Question

Vegas Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years but is currently contemplating some kind of dividend. The capital accounts for the firm are: Common stock (2,500,000 shares) $12,500,000 Retained earnings 22,500,000 Net worth $35,000,000 The company’s stock is selling for $20 per share, and it earned $5,000,000 during the year with 2,500,000 shares outstanding, indicating a P/E ratio of 10. a. Restate the capital accounts at year end after the 10% stock dividend. Common stock $ 13750000 13750000 Incorrect Retained earnings 17500000 17500000 Correct Net worth 31250000 31250000 Incorrect b. Restate the EPS and share price. (Assume the P/E ratio remains constant.) (Do not round intermediate calculations. Round the final answers to 2 decimal places.) EPS $ 1.82 1.82 Correct Share price $ 18.18 18.18 Correct c. How many shares would an investor end up with if he or she originally had 150 shares? Number of shares 165 165 Correct shares d. If an investor originally had 150 shares, what is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant? (Do not round intermediate calculations.) Total investment Before stock dividend $ 3000 3000 Correct After stock dividend $ 3000 3000 Correct

Answer 1

	a	10% Stock Dividend
		Common Stock	$12,500,000
		Number of coomon shares outtanding before dividend	2,500,000
		Par value of each share=12500000/2500000	$5.00
		Number of coomon shares given as dividend	250,000	(10%*2500000)
		Journal Entry of Stock Dividend:
		Retained Earnings (250000*$20)…Dr	$5,000,000
		Common Stock (250000*$5)…………………..Cr		$1,250,000
		Paid in Capitalin Excess of par(5000000-1250000)………...Cr		$3,750,000
		Common Stock (12500000+1250000)	$13,750,000
		Retained Earnings (22500000-5000000)	$17,500,000
		Net Worth (13750000+17500000+3750000)	$35,000,000
		Earnings	$5,000,000
		Number of shares outstanding(2500000+250000)	2,750,000
		Earning Per Share	$1.82
		Price Earning Ratio	10
		Share Price (1.82*10)	$18.18
		Number of shares investor originally had	150
		Stock dividend received (10%*150)	15
		Number of shares investor will have after stock dividend	165	(150+15)
		Market Price of share after stock dividend	$18.18
		Worth of investors total investment after stock dividend	$3,000	(165*18.18)
		Worth of investors total investment before stock dividend	$3,000	(150*20)