P1416 Stock dividend versus stock split Firm The board of Wi

P14-16 Stock dividend versus stock split: Firm The board of Wicker Home Health Care, Inc., is ex 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, alter- natively, a 5-for-4 stock split. At the present time, the firm\'s equity account and other per-share information are as follows: ploring ways to expand the number of shares outstanding in an effort to Preferred stock Common stock (100,000 shares at $1 par) Paid-in capital in excess of par Retained earnings 0 100,000 900,000 700,000 $1,700,000 Total stockholders\' equity Price per share Earnings per share Dividend per share $30.00 $3.60 $1.08 Show the effect on the equity accounts and per-share data of a 20% stock dir. dend a. 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 carnings? d. What legal constraints might encourage the firm to choose a stock split over stock dividend?

Solution

a. Stock dividend (20% * 100000 shares) = 20000 shares

Total common stock at end = 100000 + 20000 = 120000

Increase in common stock ($1 * 20000) = $20000

increase in paid in capital excess of par ($29 * 20000) = $580000

Decrease in Retained earnings[$20000 + $580000] = $600000

Earning per share = [$3.6 * 100000 ] / 120000 shares

= $360000 / 120000

= $3 per share decrease in EPS