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 1 year ago

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