Briefly explain why the share-market impact of the announcement of an LBO might be so different to that of the other corporate restructuring transactions studied by Eckbo and Thorburn.
Acme Corporation consists of 250 grocery stores throughout the Midwest. At the beginning of 2008 its statement of net worth showed the following information: Common Stock ($1 par) $400,000; Capital paid in excess of par $1,400,000 and retained earnings $500,000. During the year, net income equaled $160,000. Management was undecided on what to do with the income. Acme paid an annual dividend of $.35 per share last year and the stock price is currently $14.50. Acme has a 6% growth rate in earnings and dividends, and is in the 40% tax bracket.
a) What return on investment would Acme have to earn in order to justify retaining 2008's earnings? Use the formula:
b) What changes would occur in stockholder's equity if a $.25 cash dividend was paid? If a 5% stock dividend was given and no cash dividend was paid?
c) What would EPS be before and after the stock dividend?