Health Systems Inc. is considering a 10 percent stock dividend. The capital acco

Question

Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows: Common stock (6,000,000 shares at $10 par) Capital in excess of par Retained eamings S 60,000,000 35,000,000 75,000,000 Net worth S170,000,000 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 $28 per share. The company had total earnings of $12,000,000 with 6,000,000 shares outstanding and eamings per share were $2.00. The firm has a P/E ratio of 14 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).) Capital Accounts Common stock Capital in excess of par Retained earnings Net worth 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.) EPS Stock price c. How many shares would an investor have if he or she originally had 90 (Do not round intermediate calculations and round your answer to the nearest whole share.) Number of shares

Explanation / Answer

a. New shares to be issued in Stock Dividend = 6,000,000 x 10% = 600,000
Number of common stock after stock dividend = 6,000,000 + 600,000 = 6,600,000

Increase in Capital in excess of par = 600,000 x ($28 - $10) = $10,800,000
Capital in excess of par after stock dividend = $35,000,000 + $10,800,000 = $45,800,000

Change in Retained Earnings = 600,000 x $28 = $16,800,000
Retained Earnings after stock dividend = $75,000,000 - $16,800,000 = $58,200,000

Common Stock

$66,000,000

Capital in excess of par

$45,800,000

Retained earnings

$58,200,000

Net Worth

$170,000,000

b. Post-split earnings per share

= Earnings / Number of shares

= $12,000,000 / (6,000,000 + 600,000)

= $1.82

Post-split price

= P/E ratio × Earnings per share

= 14 × $1.82

= $25.4545

c. Post-split investor shares = Original shares × (1 + Dividend percent)
= 90 x (1+10%) = 99

d. Before stock dividend investment value = Pre-split stock price × Pre-split shares
=> $28 × 90 = $2,520

After stock dividend investment value = Post-split stock price × Post-split shares
=> $25.4545 x 99 = $2,520

Please post remaining question separately as Chegg policy allows us to solve upto 4 subparts of a question. Please don't forget to give a thumbs-up.

Common Stock

$66,000,000

Capital in excess of par

$45,800,000

Retained earnings

$58,200,000

Net Worth

$170,000,000

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.