Question

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*		20,000,000
Retained earnings		45,000,000
Net worth	$	95,000,000

*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 $42 per share. The company had total earnings of $8,400,000 with 3,000,000 shares outstanding and earnings per share were $2.80. The firm has a P/E ratio of 15.

e. Assume Mr. Heart, the president of Health Systems, wishes to benefit stockholders by keeping the cash dividend at a previous level of $1.05 in spite of the fact that the stockholders now have 10 percent more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $42.

What is an investor’s total investment worth after the stock dividend if he/she had 90 shares before the stock dividend?

Total Investment?

f. Under the scenario described in part e, is the investor better off?

• Yes

• No

g. As a final question, what is the dividend yield on this stock under the scenario described in part e? (Input your answer as a percent rounded to 2 decimal places.)

Dividend yield?

Answer 1