Question: Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend. The capital accounts for the firm are as follows:
The company's stock is selling for $20 per share. The company had total earnings of $4,000,000 during the year. With 2,000,000 shares outstanding, earnings per share were $2.00. The firm has a P/E ratio of 10.
a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts.
b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.)
c. How many shares would an investor end up with if he or she originally had 100 shares?
d. What is the investor's total investment worth before and after the stock dividend if the P/E ratio remains constant? (There may be a $1 to $2 difference due to rounding.)
e. Has Ace Products pulled a magic trick, or has it given the investor something of value? Explain.