Ace Products sells marked playing cards to blackjack dealers. It has not paid a
ID: 2740037 • 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 $30 per share. The company had total earnings of $7,500,000 during the year. With 2,500,000 shares outstanding, earnings per share were $3. 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. No of shares issued for stock dividend = 2500000 / 10 = 250000
b. Earnings = $7500000
No. of shares = 2750000
EPS = 7500000 / 2750000 = $2.7272......
PE Ratio = 10 times
Stock price = EPS x PE Ratio = 2.7272x10 = $27.27
c. No. of shares after stock dividend = 160 x 1.10 = 166 shares
d.
$ Common Stock(2500000+250000)x$5 13750000 Capital in excess of par 7000000 Retained Earnings 24500000 Net worth 45250000