The management of Oodles of Noodles Inc. is contemplating a 30% stock dividend. The company currently has cash of $250,000, fixed assets of $5 million, and debt of $3 million. Its net income for the most recent fiscal year was $800,000.
a. What would be the effect of such a stock dividend on the following?
i. Number of shares outstanding
ii. Earnings
iii. Market value of cash
iv. Market value of equity
v. Share price
vi. Earnings per share (EPS)
vii. Price-earnings ratio (P/E)
viii. Shareholders’ wealth
b. If the company’s management would like to hold its EPS within the range of 0.7?0.9, should the company go ahead with the stock dividend?
c. If the company’s shareholders only care about their wealth and the P/E ratio, should the company go ahead with the stock dividend?