Question

Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been selling for $22 per share. The firm intends to retain its earnings and pay a 10% stock dividend. d. At what market price would you expect the stock to sell after the stock dividend?e. Discuss what effect, if any, the payment of stock dividends will have on Sarah’s share of the ownership and earnings of Nutri-Foods.

Answer 1

Data:

Sarah Warren: S

Nutri foods: N

Earnings Common Stockholders: Ec

Cost of shares: C

S=400 shares

N=40000 shares

Ec=$80000

C=$22/share

As the firm pay a 10% stock divident: It means that the firm is increasing the number of shares 10% (1 share per 10).

As the firm has 40000 shares:

`40000\cdot(1)/(10)=4000`

The firm will have 44000 shares. An each stockholder will have 1 share more per each 100 shares it had.

As the