Jersey Medical earns $9.50 a share, sells for $80, and pays a $7 per share dividend. The stock is split two for one and a $3.5 per share cash dividend is declared.What will be the new price of the stock? Round your answer to the nearest dollar.$ If the firm's total earnings do not change, what is the payout ratio before and after the stock split? Round your answers to one decimal place.Payout ratio before the split: %Payout ratio after the split: %

Stock split is a process in which the company divides the existing shares, thereby increasing the number of shares outstanding. Even though the number of shares increases, the total value of the shares does not change after the stock split. The purpose of stock split is to increase the liquidity of the stock.After the split, the market price will also be divided based on the stock split ratio. Given: Market price of the stock before the split: $80 A stock split ratio of 2-for-1 means the existing shareholders will have two shares for each share held by them before the stock split. Therefore, after the stock split, number of shares outstanding for every 1 share previously held will be 2. Using these values, the new price of the stock is calculated as follows- Market price of the share after stock split=Market price of the stock before the splitNumber of shares outstanding for every share previously held =$802Market price of the share after stock split=$40 Here, as the company is paying $3.5 per share cash dividend, the market price will be adjusted to $36.5 i.e $37 Therefore, the new price of the share after the stock split will be $37 per share.A payout ratio is calculated as- Payout ratio=Dividend per shareEarnings per share a) Payout ratio before the stock split Given: Earnings per share (EPS): $9.50 Dividend per share: $7 Substituting these values in the payout ratio formula, we get- Payout ratio before the split=$7$9.50Payout ratio before the split=0.7368 or 73.7% a) Payout ratio after the stock split Given: Earnings per share (EPS): $9.50 (As the earnings do not change) Dividend per share: $3.5 Substituting these values in the payout ratio formula, we get- Payout ratio after the split=$3.5$9.5Payout ratio after the split=0.3684 or 36.8%

Answered: Jersey Medical earns $9.50 a share,…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

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