Terrill Machining Inc. sells machine parts to auto mechanics. 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: Common stock (2,400,000 shares at $5 par) . Capital in excess of par* ............................... Retained earnings ......................................... Net worth ................................................... $12,000,000 5,000,000 23,000,000 $40,000,000 *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 $4,800,000 during the year. With 2,400,000 shares outstanding, earnings per share were $2.00. The firm has a P/E ratio of 10. a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts. b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.) c. How many shares would an investor end up with if they originally had 70 shares? d. What is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant?
Terrill Machining Inc. sells machine parts to auto mechanics. 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:
Common stock (2,400,000 shares at $5 par) .
Capital in excess of par* ...............................
Retained earnings .........................................
Net worth ...................................................
$12,000,000
5,000,000
23,000,000
$40,000,000
*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 $4,800,000
during the year. With 2,400,000 shares outstanding, earnings per share were $2.00. The firm has
a P/E ratio of 10.
a. What adjustments would have to be made to the capital accounts for a 10 percent stock
dividend? Show the new capital accounts.
b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains
constant.)
c. How many shares would an investor end up with if they originally had 70 shares?
d. What is the investor’s total investment worth before and after the stock dividend if the P/E ratio
remains constant?
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