Health Systems Inc. is considering a 10 percent stock dividend. The capital acco
ID: 2620758 • Letter: H
Question
Health Systems Inc. is considering a 10 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 45,000,000
Net worth $90,000,000
*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 $36 per share. The company had total earnings of $9,000,000 with 3,000,000 shares outstanding and earnings per share were $3.00. The firm has a P/E ratio of 12.
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.)
c. How many shares would an investor have if he or she originally had 100? (Do not round intermediate calculations and round your answer to the nearest whole share.)
Capital Accounts Commo stock Capital in Excess of par Retained earnings Net worthExplanation / Answer
a. Adjustments would have to be made to the capital accounts.
Common stock (3,000,000 shares at $10 par) $ 30,000,000
Capital in excess of par* 15,000,000
Retained earnings 45,000,000
Net worth $90,000,000.
10% dividend stock dividend allowed, So:-
Earnings= $9,000,000
Dividend = 10% on 30,000,000 = $ 3,000,000
Transfer to retained earnings = (9-3) million = $6 million
Retained Earnings= 45,000,000+ 6,000,000 = $51,000,000
Capital Accounts
Amount
Adjustments
Commo stock (a)
$ 30,000,000
No Adjustment.
Capital in Excess of par (b)
$ 15,000,000
No Adjustment.
Retained earnings (c}
$ 51,000,000
$6,000,000 added
Net worth(a+b+c)
$96,000,000
$6,000,000 added
b. Adjustments to be made EPS and the stock price.
EPS = Earnings Available to equity share holders / No. of Stock
= 9,000,000/ 3,000,000 = $3 per Share
Stock Price = EPS * P/E ratio = 3*12 = $36
c. How many shares would an investor have if he or she originally had 100?
Price of Share, at the beginning = 30+15 = $45
Amount Available at the Investor = 100
No. of Shares that can be purchased = 100/ 45= 2.222 = 2 shares.
Capital Accounts
Amount
Adjustments
Commo stock (a)
$ 30,000,000
No Adjustment.
Capital in Excess of par (b)
$ 15,000,000
No Adjustment.
Retained earnings (c}
$ 51,000,000
$6,000,000 added
Net worth(a+b+c)
$96,000,000
$6,000,000 added
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.