Ace Products sells marked playing cards to blackjack dealers. It has not paid a
ID: 2655343 • Letter: A
Question
Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend.
*The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times (Market price Par value).
The company’s stock is selling for $20 per share. The company had total earnings of $5,600,000 during the year. With 2,800,000 shares outstanding, earnings per share were $2. The firm has a P/E ratio of 10.
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).)
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.)
What is the investor's total investment worth before and after the stock dividend if the P/E ratio remains constant? (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend.
Explanation / Answer
a)
Stock Dividend = 10%*2800000*20 = 5,600,000
Common Stock after Stock Dividend = 28,000,000 + 10%*2800000*10
Common Stock after Stock Dividend = 30,800,000
Capital in excess of par after Stock Dividend = 6,000,000 + 10%*2800000*(20-10)
Capital in excess of par after Stock Dividend = $ 8,800,000
Retained earnings after Stock Dividend = 24,000,000 - 5,600,000
Retained earnings after Stock Dividend = $ 18,400,000
Answer
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.)
No of Outstanding Share = 2,800,000 + 10%*2,800,000
No of Outstanding Share = 3,080,000
EPS = Total earnings /No of Outstanding Share
EPS = 5600000/3,080,000
EPS = 1.82
Stock Price = EPS*PE ratio
Stock Price = 1.8181*10
Stock Price = $ 18.18
Answer
c) How many shares would an investor end up with if he or she originally had 80 shares? (Do not round intermediate calculations and round your answer to the nearest whole share.)
Number of shares = 80 + 10%*80
Number of shares = 88
d) What is the investor's total investment worth before and after the stock dividend if the P/E ratio remains constant? (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
Common stock 30,800,000.00 Capital in excess of par 8,800,000.00 Retained earnings 18,400,000.00 Net worth 58,000,000.00