Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shar

Question

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.

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

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

C. What proportion of the firm will sarah own after the stock dividend? explain your answer.

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

E. Discuss what effect, if any the payment of stock dividend will have on Sarah's share of the ownership and earnings of Nutri-Foods?

PLEASE SHOW WORK.

Explanation / Answer

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

The firm currently earn per share = 80000/40000

The firm currently earn per share = $ 2

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

Proportion of the firm does Sarah currently own = 400/40000

Proportion of the firm does Sarah currently own = 1%

C. What proportion of the firm will sarah own after the stock dividend? explain your answer.

After Stock Dividend Total Common Stock Outstanding = 40000 + 40000*10% = 44000

After Stock Dividend Sarah Holding would be = 400 + 10%*400 = 440

Proportion of the firm will sarah own after the stock dividend = 440/44000

Proportion of the firm will sarah own after the stock dividend = 1%

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

After Stock Dividend Total Common Stock Outstanding = 40000 + 40000*10% = 44000

Total Market Value before stock dividend =40000*22 = $ 880000

Market Price would you expect the stock to sell after the stock dividend = 880000/44000

Market Price would you expect the stock to sell after the stock dividend = $ 20

E. Discuss what effect, if any the payment of stock dividend will have on Sarah's share of the ownership and earnings of Nutri-Foods?

Ownership would not effect as Sarah's Share also increase in same proprtion

Earning per Share would be = 80000/44000

Earning per Share would be = 1.82

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