Problem: The board of Wicker Home Health Home Health Care, Inc, is exploring ways to expand the number of shares outstanding in an effort to reduce the market price per share to a level that the firm considers more appealing to investors. The options under consideration are a 20% stock dividend and, alternatively, a 5-for-4 stock split. At the present time, the firm's equity account and other per-share information are as follows:
Preferred Stock $0
Common stock (100,000 shares at $1 par) $100,000
Paid-In capital in excess of par $900,000
Retained Earnings $700,000
Total Stockholders' Equity $1,700,00
Price per share $30,000
Earnings per share $3.60
Dividend Per share $1.08
A. Show the effect on the equity accounts and per-share data of a 20% stock dividend.
B. Show the effect on the equity accounts and per-share data of a 5-for-4 stock split.
C. Which option will accomplish Wicker's goal of reducing the current stock price while maintaining a stable level of retained earnings.
D. What legal constraints might encourage the firm to choose a stock split over a stock dividend?