Question

Stock dividend-Investor Personal Finance Problem Sarah Warren currontly holds 800 shares of Nutri-Foods. The firm has 38,000 shares outstanding. The firm most recently had eamings available for common stockholders of $76,000, and its stock has been selling for $25 per share. The firm intends to retain its eamings and pay a 20% totok dividend.

a. How much does the firm currently eam per share?
b. What proportion of the firm does Sarah Warren currently own?
c. What proportion of the firm wil Warren own atter the stock dividend?
d. At what market price would you expect the stock to telll afer the stock dividend?
e. Discuss what eflect, if any, the payment of stock dividends wit have on Sarah's share of the owtership and eamings of Nutri-Foods

Answer 1

The firm currently earns $2 per share; Sarah Warren owns 2.1% of the firm before and after the stock dividend; the stock price is expected to decrease to $20.83 per share post-dividend; there's no effect on Sarah's proportionate ownership or earnings.

Step-by-step explanation:

a) $2 per share, b) 2.1%, c) 2.1%, d) $20.83 per share, e) No change in proportionate ownership or earnings share.

To address the personal finance problem faced by Sarah Warren regarding Nutri-Foods, we start by calculating the earnings per share (EPS). EPS is determined by dividing the total earnings available to common stockholders by the number of shares outstanding. Therefore, $76,000 divided by 38,000 shares results in an EPS of $2. Sarah currently owns 800 out of 38,000 shares, which gives her a proportionate ownership of about 2.1% of the firm.

After the 20% stock dividend, she will receive 20% more shares, that is 160 additional shares (20% of 800), for a new total of 960 shares. Because all shareholders receive the same 20% increase, the total number of shares outstanding will also increase by 20%, resulting in 45,600 shares. Sarah's proportion of ownership remains the same at 2.1% since both the number of her shares and the total shares have increased proportionally.

The market price often adjusts after a stock dividend to reflect the increased number of shares. Assuming no other market factors affect the price, the price can be expected to decrease proportionally. If previously the stock was $25 per share, after increasing the share count by 20%, the new expected price would be $25 divided by 1.2, or approximately $20.83 per share. Despite the change in stock price, Sarah's overall market value and her share of the ownership remain the same.