Question

P14–11Stock dividend: Investor Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been selling for $22 per share. The firm intends to retain its earnings and pay a 10% stock dividend.

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

2. What proportion of the firm does Sarah currently own?

3. What proportion of the firm will Sarah own after the stock dividend? Explain your answer.

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

5. 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

a) AMount firm currently earn per share = Total earnings / no of shares outstanding

= 80000 / 40000

= $2

b)

Proportion of the company owned by Sarah = No of shres owned by sarah / no of shares outstanding

= 400 / 40000 * 100

= 1%

c)

Stock dividend = 10%

Total no of stocks outstanding after stock dividend = 40000 + 0.1 * 40000 = 44000

no of stock owned by Sarah after stock dividend = 400 * 1.1 = 440

Proportion of the company owned by Sarah after stock dividend

= No of shres owned by sarah after stock dividend / no of shares outstanding after stock dividend.

= 440 /44000 = 1%

d) stock price after the stock dividend = stock pricce before the stock dividend / ( 1 + stock dividend% )

= 22 / 1.1

= $20

e)

There is no change in share of ownership of sarah due to stock dividend as the ownership remains the same. Only there is dilution in the price of shares.