Question

Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend.

The capital accounts for the firm are as follows:

Common stock (3,000,000 shares at $5 par)	$	15,000,000
Capital in excess of par*		4,000,000
Retained earnings		24,000,000
Net worth	$	43,000,000

*The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times (Market price − Par value).

The company’s stock is selling for $40 per share. The company had total earnings of $12,000,000 during the year. With 3,000,000 shares outstanding, earnings per share were $4. The firm has a P/E ratio of 10.

a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts. (Do not round intermediate calculations. Input your answers in dollars, not millions (e.g. $1,230,000).)

b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

Answer 1