Question

Problem P14-11, p. 638: Stock dividend: Investor 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?

Answer 1

First, consider there are 40,000 shares with a proce $22 each.

The price of all shares is:

22 x 40,000 = 880,000

Next, consider that stock dividend of %10 is payed:

880,000 - 0.1x880,000 = 792,000

THe price per share is:

792,000/40,000 = 19.8

Hence, the market price would be $19.8