Homework SourseThe company with the common equity accounts shown here has d
The company with the common equity accounts shown here has decided on a two-for-one stock split. The firm’s 36-cent-per-share cash dividend on the new (postsplit) shares represents an increase of 20 percent over last year’s dividend on the presplit stock.
What is the new par value of the stock?
What was last year’s dividend per share?
| Common stock ($1 par value) | $ | 480,000 | |
| Capital surplus | 1,556,000 | ||
| Retained earnings | 3,880,000 | ||
| Total owners’ equity | $ | 5,916,000 | |
Solution
Current par value (Before Split) = $1 per share
Number of share outstanding = 480,000
Company has decided two-for-one stock split, it mean for each existing stock, company give one additional stock.
Par value after split = $1.00 / 2
= $0.50.
Par value after split is $0.50 per share and number of share outstanding become 960,000 (480,000 × 2).
b.
Dividend per share after split = $0.36.
Total Dividend = 960,000 × $0.36
= $345,600.
Total Dividnd paid after split is $345,600.
Growth rate in dividend = 20%
So, Dividend last year = $345,600 / (1 + 20%)
= $288,000.
Total Dividend last year was $288,000.
Dividend per share last year = $288,000 / 480,000
= $0.60
last year’s dividend per share was $0.60.
