Question

Pharoah Company has had 4 years of record earnings. Due to this success, the market price of its 500,000 shares of $4 par value common stock has increased from $15 per share to $55. During this period, paid-in capital remained the same at $6,000,000. Retained earnings increased from $4,500,000 to $30,000,000. CEO Don Ames is considering either (1) a 15% stock dividend or (2) a 2-for-1 stock split. He asks you to show the before-and-after effects of each option on (a) retained earnings, (b) total stockholders’ equity, and (c) par value per share.

Answer 1

An investor would pay approximately $256,500 per share of Babble, Inc., by finding the present value of the expected dividends and dividing by the number of shares (200).

Step-by-step explanation:

To calculate what an investor would pay for a share of stock in Babble, Inc., we must determine the present value (PV) of the future dividends, given the expectation of the company being disbanded in two years. Given the anticipated profits are $15 million today, $20 million in one year, and $25 million in two years, we can

calculate the present value of each year's dividends using a discount rate, which is typically the investor's required rate of return. If we assume a discount rate of 15%, we discount the future dividends back to their value in today's dollars.

Once we have the total present value of all future dividends, we divide this number by the total number of shares to find the price per share an investor would be willing to pay. In this case, with a total PV of profits equal to $51.3 million and 200 shares available, we divide $51.3 million by 200 to find the price per share, which is roughly $256,500 per share.

Answer 2

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

1) 15% Stock Dividend-

Retained Earnings = Increase Value of Retained Earnings - (Total Shares × 15% Stock Dividend × Increase Value of Per Share)

= $30,000,000 - (500,000 × 15% × $55)

= $30,000,000 - $4,125,000

= $25,875,000

2) 2-for-1 stock split-

Retained earnings = $30,000,000

The 2-for-1 stock split will not impact retained earnings.

a and b) The before, after effects of each option are shown in the attachment below

c) Par value per share

Par value per share of stock dividend = $4

Par value per share of 2-for-1 stock split = $4 ÷ 2 = $2

According to the analysis, stock dividend will not make any impact.