Health Systems Inc. is considering a 20 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* |
|
15,000,000 |
Retained earnings |
|
40,000,000 |
Net worth |
$ |
85,000,000 |
|
*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 $35 per share. The company
had total earnings of $7,500,000 with 3,000,000 shares outstanding
and earnings per share were $2.50. The firm has a P/E ratio of
14.
a. What adjustments would have to be made to the
capital accounts for a 20 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).)
|
|
|
Capital Accounts |
Common stock |
|
Capital in excess of par |
|
Retained earnings |
|
Net worth |
$0 |
|
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.)
c. How many shares would an investor have if he
or she originally had 130? (Do not round intermediate
calculations and round your answer to the nearest whole
share.)
d. What is the investor’s total investment
worth before and after the stock dividend if the P/E ratio remains
constant? (Do not round intermediate calculations and round
your answers to the nearest whole dollar.)
|
|
|
Total Investment |
Before stock dividend |
|
After stock dividend |
|
|
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 20 percent more shares. Because the cash
dividend is not reduced, the stock price is assumed to remain at
$35.
What is an investor’s total investment worth after the stock
dividend if he/she had 130 shares before the stock dividend?
f. Under the scenario described in part
e, is the investor better off?
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.)