Question

The company with the common equity accounts shown here has declared a four-for-one stock split when the market value of its stock is $61 per share. The firm’s 75-cent per share cash dividend on the new (postsplit) shares represents an increase of 10 percent over last year’s dividend on the presplit stock. what effect does this have on the equity accounts? what was last year's dividend per share?

common stock ($1 per value) : 275000

capital surplus : 763000

retained earnings : 3284000

total owners' equity : 4332000

Answer 1

Four-for-one stock split means that the existing equity investors will be owning four equity shares for every one equity share owned. The market value of the stock will become $15.25 post the split (61/4). However, the market capitalization will remain the same.

The effect on common stock will be as follows :

2,75,000 shares will increase to 1,100,000 shares (2,75,000 x 4)

While the total owner's equity will remain the same (i.e. before the payment of dividends). Post payment of dividend , retained earnings will decrease by $8,25,000

Since dividend paid post split is $825,000 (1.1 million shares x 75 cents), which is 10% higher than that of last year, previous year's dividend payment was $750,000 (2.73$ dividend/share)