Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been selling for $22 per share. The firm intends to retain its earnings and pay a 10% stock dividend.
a) How much does the firm currently earn per share?
b) What proportion of the firm does Sarah currently own?
c) What proportion of the firm will Sarah own after the stock dividend?
d) At what market price would you expect the stock to sell after the stock dividend?
e) Discuss what effect, if any, the payment of stock dividend will have on Sarah’s share of ownership and earnings of Nutri-Foods.