Question

Stock dividend—Investor Personal Finance Problem Sarah Warren currently holds 300 shares of Nutri-Foods. The firm has 36,000

shares outstanding. The firm most recently had earnings available for common stockholders of $85,000, and its stock has been selling for

$22 per share. The firm intends to retain its earnings and pay a 20% stock dividend.

a. How much does the firm currently earn per share?

b. What proportion of the firm does Sarah Warren currently own?

c. What proportion of the firm will Warren own after the stock dividend?

d. At what market price would you expect the stock to sell after the stock dividend?

e. Discuss what effect, if any, the payment of stock dividends will have on Sarah's share of the ownership and earnings of Nutri-Foods.

Answer 1

	Given,
	Number of shares Sarah Warren holds	300
	Total number of shares outstanding	36000
	Earnings available for equity shareholders	$85,000
	Price per share	$22
	Stock dividend declared	20%
a)	Calculation of earning per share
	Earning per share= Earning available for equity shareholders/Total number of shares outstanding
		$85000/36000
		$2.36
b)	Calculation of proportion of the firm Sarah Warren currently owns
	Sarah's current holding= (Number of shares held/Total number of shares outstanding)*100
		(300/36000)*100
		0.83%
c)	Sarah Warren will continue to hold 0.83% in the firm even after stock dividend because stock dividend doesnot change the ownership pattern (because number of shares held and total shares outstanding both increases with the stock dividend). As stock dividend percentage i.e. 20% gets added to both numerator and denominator it actually nullifies leaving the percentage of ownership same.
d)	Calculation of price after stock dividend
	By stock dividend the number of shares outstanding increases reducing per share market price, market capitalisation remains the same
	Price after stock dividend= $22/1.20
	$18.33
e)	Discussion on effect of ownership and earnings
	Ownership- Discussed in part c.
	Earnings- The earnings per share would reduce as the total number of shares outstanding will increase (i.e. available earnings would be distributed to larger number of shares outstanding). Further the market capitalisation would remain the same as price per share after the dividend decreases.

* for arithmetical accuracy, figures are rounded off to two decimal places.