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

QUESTION

Stock dividendInvestor 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 Warren currently own?c. What proportion of the firm will Warren 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 dividends will have on Warrens share of the ownership and earnings of Nutri-Foods.
a. How much does the firm currently earn per share? EPS = Earnings available for common shareholders / Outstanding shares = $80,000 / 40,000 = $2.00 b. What proportion of the firm does Warren currently own? Proportionate ownership = Shares held by Warren / Total outstanding shares = 400 / 40,000 = 1.00% c. What proportion of the firm will Warren own after the stock dividend? Explain your answer. 10% stock dividend means 1 share to given as dividend for every 10 shares held. Hence, Warren will get 40 shares as stock dividend and total shares to be given as stock dividend will be 4,000 Proportionate ownership of Warren post stock dividend = 440 / 44,000 = 1% d. At what market price would you expect the stock to sell after the stock dividend? Value of stock will fall post stock dividend. This is because, the value of firm should be same pre and post dividend. Value of firm pre-dividend = no of shares * market price = 40,000 * $22 =

000 Value of firm post-dividend = $880,000 but number of outstanding shares now is 44,000 Hence, market price of the stock post-dividend = $880,000 / 44,000 = $20 per share e. Discuss what effect, if any, the payment of stock dividends will have on Warrens share of the ownership and earnings of Nutri-Foods. Payout of dividends, whether in cash or stocks, does not affect ownership of investors. Hence, Warrens proportionate ownership in the Firm will remain same at 1% pre and post dividend payments. Also as long as Nutri-Foods earnings remain unchanged, Warrens share of earnings will also remain unchanged.

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