Problem:
In the spring of 2014, the CFO of Placebo Pharmaceuticals, Inc. took a proposal to the firms board of directors to distribute a non cash dividend to the firm's shareholders in the form of new shares of common stock. Specifically, the CFO proposed that the company pay 0.025 shares to the holders of each share of common stock such that the holder of 1000 shares of stock would receive an additional 25 shares of common stock.
Required:
Question 1: If Placebo had a total net income for the year of $8,000,000 and 24,000,000 share of common stock outstanding before the stock dividend, what are the firms earnings per share?
Question 2: After paying the stock dividend, what are the firms earnings per share?
Question 3: if you owned 1000 shares of stock before the stock dividend, how many dollars of earnings did the firm earn on your 1000 share investment?
Question 4: After the stock dividend is paid, how many dollars of earnings did the firm earn on your larger share holdings?
Question 5: What effect would you expect from the payment of the stock dividend on your total investment in the firm?
Note: Please show how you came up with the solution.