Question

Medany co. has a stock with a face value equal $30, the number of stocks is...

Medany co. has a stock with a face value equal $30, the number of stocks is 400,000 and the premium is $800,000; reserves are $5,200,000 and the retained earnings are $4,000,000. If the company decided to pay the owners dividends in term of stocks (for the market value), the dividends is equal to $4,000,000 and the market value of the stock is equal to $50.

Required

1- What is the effect of this dividend policy on the equity of Medany co.?

2- Calculate the effect of this dividend policy on the market price of Medany co. stock.

Business   Accounting   
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Answer #1

Requirement 1:

The Given Dividend Policy will have the effect the equity of the company to increase by $ 4,000,000.

Out of which, the face value will be 80,000*30 =$2,400,000 & Premium =$1,600,000

Total No. of stocks will Increase by 80,000 shares

Requirement 2:

Market price of the stock before dividend policy = $ 50 per share

Market Value of the company before dividend issue = 50*400,000 =$20,000,000

Stock after dividend policy = 400,000 + 80,000 = 480,000 shares

Therefore, market price of the stock after dividend policy = 20,000,000/480,000 =$41.67 per share

The market value of the share has decreased after dividend policy by $ 8.33 per share

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