Question

Stock dividend: Investor 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 dividends will have on Sarah’s share of the ownership and earnings of Nutri-Foods.

Answer 1

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

Since, the firm it's going to retain 90% of its earnings, then:

$22\cdot\frac{90}{100}=19.8$

The firm earns $19.8 per share.

b. What proportion of the firm does currently own?

The firm has 40,000 shares and Sarah currently holds 400, so

$\begin{gathered} \text{Percentage is given by the expresion:} \\ \text{Total}\cdot\frac{\text{percent}}{100}=nu\text{mber equals to the percent} \\ \text{Then,} \\ 40,000\cdot\frac{\text{percent}}{100}=400 \\ \text{percent}=\frac{400\cdot100}{40,000} \\ \text{percent}=1 \end{gathered}$

Sarah owns 1% of the shares.

c. What proportion of the firm will Sarah own after the stock dividend?

$\begin{gathered} 400-(400\cdot\frac{10}{100})=360 \\ \text{Then,} \\ 40,000\cdot\frac{perrcent}{100}=360 \\ \text{percent}=\frac{360\cdot100}{40,000} \\ \text{prcent}=0.9 \end{gathered}$

Sarah will own 0.9% of the shares.

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