Ace Products sells marked playing cards to blackjack dealers. It has not paid 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 capital accounts for the firm are as follows: 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 S30 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

Explanation / Answer

a. Adjustments to Capital Accounts for 10% Stock Dividend Common Stock $ 13500000 Capital in excess of par * 14750000 (Original Balance + Stock Dividend being declared) Stock Dividend @ 10% means an increase of 270,000 shares at $ 30 - $ 5 = $ 25 Retained Earnings 31250000 (Original Balance + Earnings for the year - Dividend declared) b. EPS and Stock Price under revised scenario EPS = Net Earnings/No. of shares           2.73 $ per share Stock Price = 10 X Earnings per share (Since P/E ratio is maintained at 10) Hence, Stock Price = 2.73*10 27.3 $ c. If an investor had 160 shares originally, he would now end up with 160 X 110% = 176 shares. d. If the P/E Ratio remains constant, Investors' Total Investment before dividend = 160 shares @ $5 per share = $ 800 Investors' Total Investment after dividend = 176 shares @ $5 per share = $ 880

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