Ace Products sells marked playing cards to blackjack dealers. It has not paid a
ID: 2740203 • 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 $8,100,000 during the year. With 2,700,000 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. Common stock (2,970,000 shares at $5 par) $14,850,000
*Capital in excess of par 14,750,000
**Retained earnings 16,400,000
Net worth $46,000,000
Number of new shares = Dividend percent * Number of shares outstanding
Number of new shares = 0.10 * 2,700,000
Number of new shares = 270,000
Common Stock = Shares outstanding * par value per share
Common Stock = 2,700,000 + (270,000 * (30 - 5))
Common Stock = $9,450,000
Retained Earning = Original account balance – (Number of new shares * stock price)
Retained Earning = 24,500,000 – (270,000 * 30)
Retained Earning = $16,400,000
b. EPS after stock dividend = $8,100,000/$2,970,000 = $2.73
Price = P/E ratio * EPS = 10 * 2.73 = $27.3
c. 160 + (160 * 10%) = 176 shares after the stock dividend
d. Before After
160 * $30 = $4,800 176 * $27.30 = $4805
a. Common stock (2,970,000 shares at $5 par) $14,850,000
*Capital in excess of par 14,750,000
**Retained earnings 16,400,000
Net worth $46,000,000
Number of new shares = Dividend percent * Number of shares outstanding
Number of new shares = 0.10 * 2,700,000
Number of new shares = 270,000
Common Stock = Shares outstanding * par value per share
Common Stock = 2,700,000 + (270,000 * (30 - 5))
Common Stock = $9,450,000
Retained Earning = Original account balance – (Number of new shares * stock price)
Retained Earning = 24,500,000 – (270,000 * 30)
Retained Earning = $16,400,000
b. EPS after stock dividend = $8,100,000/$2,970,000 = $2.73
Price = P/E ratio * EPS = 10 * 2.73 = $27.3
c. 160 + (160 * 10%) = 176 shares after the stock dividend
d. Before After
160 * $30 = $4,800 176 * $27.30 = $4805
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