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. a. How much does the firm currently earn per share? a. How much does the firm currently earn per share?

Answer 1

pay a 10% stock dividend means that the firm will increase the shares 10% (1 share per each 10).

The earns per share after the stock dividend will decrease, as the number of shares increase.

If the firm has 40000 shares after the stock dividend will have: 44000 shares.

`40000\cdot(1)/(10)=4000`
`40000+4000=44000`

Then, the price per share gets adjusted in proportion to the stock dividend:

The price per share decreases 10%

The 10% of $22 is: $2.2

`22\cdot(10)/(100)=2.2`
`22-2.2=19.8\approx20`

Then, the firm will earn approx. $20 per share after the stock dividend.