Assume Harris, Inc. Has 10,000,000 common shares outstanding that have a par val

Question

Assume Harris, Inc. Has 10,000,000 common shares outstanding that have a par value of $2 per share. The stock is currently trading for $30 per share. The firm reported a net profit after-tax of $25,000,000. All else equal, what will happen to earnings per share if the company issues a 10 % stock dividend?

a. Earnings per share will remain the same since a stock dividend does not create an expense.
b. Earnings per share will increase because the dividend increases the value of the company.
c. Earnings per share will decrease because the number of shares outstanding will go up.
d. The impact cannot be determined without additional information on the new price per share.

Explanation / Answer

The answer here is that the Earnings per share will DECREASE because the number of shares go UP after a stock dividend. Essentially, a 5% stock dividend means that if you have 100 shares you get 5 more and the number of shares outstanding goes up by 5%. The value of the firm is not changed but the number of shares outstanding goes up. Hope this helps!

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