Question

Patrick Ntini holds 500 shares in Aloes Processing Co. The firm has 50 000 shares outstanding and R100 000 earnings available to common shareholders. Shares are currently selling at R25 per share. The firm decides to retain earnings and rather issue a 10% share dividend.

Based on the above, answer the following questions:

1.1 Determine the current EPS value. (3)

1.2 What proportion of the firm does Patrick currently hold? (3)

1.3 What proportion of the firm will Patrick hold after the share dividend? (4)

1.4 At what market price should the stock sell after the share dividend? (5) 1.5 Discuss how Patrick is affected by the share dividend (5)

Answer 1

	Data Available
1	Patrick holds	500	shares
2	Total shares outstnading	50,000
3	EAES (Earnings available to shareholders)	100,000
4	Current Selling price of the share	25
5	Annual dividend	10%

	Answers as follows
1.1	Current EPS Value
	EPS =	EAES
		Total shares outsanding
	=	100000
		50000
	=	2

1.2	Proportion of firm held by patrick
	=	Shares held by Patrick
		Total shares outsanding
	=	500
		50,000
	=	1%

1.3	Proportion of firm held by patrick after dividend
	=	Shares held by Patrick after dividend
		Total shares outstanding after dividend
	=	500
		50,000
	=	1%
	Distribution of dividend has no impact on number of shares held by Patrick nor does it have an impact on total shares outstanding by the Company.
	Accordingly there is no change in proportion of share held by Patrick

1.4	Price at which stock should sell after dividend
	Existing P/E Ratio before dividend
	=	Price per share
		Earnings per share
	=	25
		2
	=	12.5
	Earnings available to equity shareholders after dividend per share
	=	(Earnings before dividend - Dividend) / No of share
	=	100,000 - (10% * 50000*1) / 50000
	=	1.9
		Face Value is assumed to be 1 in the absence of information
	Price after dividend
	=	Earnings per share after dividend * Existing PE Ratio
	=	1.9 * 12.5
	=	23.75