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Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows:...

Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows:

Common stock (3,000,000 shares at $10 par) $ 30,000,000

Capital in excess of par* 15,000,000

Retained earnings 45,000,000

Net worth $90,000,000

*The increase in capital in excess of par as a result of a stock dividend is equal to the shares created times (Market price – Par value).

The company’s stock is selling for $36 per share. The company had total earnings of $9,000,000 with 3,000,000 shares outstanding and earnings per share were $3.00. The firm has a P/E ratio of 12.

a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts. (Do not round intermediate calculations. Input your answers in dollars, not millions (e.g. $1,230,000).)

Common Stock =   

Capital in excess of par =

Retained Earnings =

Net worth =

b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

EPS =

Stock Price=

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Expert Solution

Formula sheet

A B C D E F G H
2
3 Data Given:
4
5 Number of Stocks Outstanding 3000000
6 Par Value of Stock 10
7
8 Common Stock 30000000
9 Capital in excess of Par 15000000
10 Retained Earnings 45000000
11 Net Worth 90000000
12
13 Current Price of Stock 36
14 Total Earnings 9000000
15 EPS 3
16 P/E 12
17
18 Stock Dividend 0.1
19
20 For a 10% stock dividend 10% of the outstanding stocks will be issued.
21
22 Number of stocks to be issued =D5*D18
23 Issue Price =D13
24 Journal entry for Stock Dividend:
25 Account Debit Credit
26 Retained Earnings =D22*D23 =D22*D23
27 Common Stock =D22*D6
28 Capital in Excess of Par =D26-E27
29
30 Thus retained earnings decreases and common stock and capital in excess of par increases by above amount.
31
32 Number of shares outstanding after Stock Dividend =D5+D22
33
34 Common Stock =D8+E27 =D8+E27
35 Capital in Excess of Par =D9+E28 =D9+E28
36 Retained Earnings =D10-D26 =D10-D26
37 Net Worth =SUM(D34:D36) =SUM(D34:D36)
38
39 b)
40
41 EPS =Total Earnings / Total number of outstanding shares
42 =D14/D32 =D14/D32
43
44 Market Value of the firm before and after the stock dividend will remain same.
45 Market Value of the firm before dividend =D5*D13
46
47 Price per share after stock Dividend =D45/D32 =D45/D32
48
49 P/E =Price per share / EPS
50 =D47/D42
51
52 Hence after stock dividend,
53 EPS =D42
54 Stock Price =D47
55

jeff jeffy answered 3 years ago
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