a. Assume United Equipment Corp. in the prior problem had total earnings of $400,000 before the stock dividend. It also had a P/E ratio of 10. What were the EPS and stock price before the stock dividend? b. After the stock dividend, what will earnings per share and the stock price be? Assume the P/

Question

a. Assume United Equipment Corp. in the prior problem had total earnings of [latex]\$400,000[/latex] before the stock dividend. It also had a P/E ratio of 10. What were the EPS and stock price before the stock dividend?

b. After the stock dividend, what will earnings per share and the stock price be? Assume the P/E ratio stays at 10.

c. Albert Gonzales owned 100 shares before and 110 after the stock dividend.

What is the value of his portfolio (total holdings) before and after the stock dividend? Is he any better off as a result of the stock dividend?

Accepted Answer

a. EPS before the stock dividend = Earnings/Shares [latex]=\$ 400,000 / 200,000=\$ 2[/latex]

Stock price before the stock dividend [latex]=[/latex] P/E ratio [latex] imes[/latex] EPS [latex]=10 imes \$ 2=\$ 20[/latex]

b. [latex]\quad[/latex] EPS after the stock dividend [latex]=[/latex] Earnings [latex]/[/latex] Shares [latex]=\$ 400,000 / 220,000=\$ 1.82[/latex]

Stock price after the stock dividend [latex]=10 imes \$ 1.82=\$ 18.20[/latex]

c. Value of portfolio before the stock dividend:

100 shares [latex] imes \$ 20[/latex] stock price [latex]=\$ 2,000[/latex]

Value of portfolio after the stock dividend:

[latex] 110 ext { shares } imes 18.20 ext { stock price }=\$ 2,002 [/latex]

The only difference between the before and after stock price is due to rounding [latex](\$ 2,000 \mathrm{vs} . \$ 2,002)[/latex]. Albert Gonzales is no better off.

Question 18.2: a. Assume United Equipment Corp. in the prior problem had to...

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