Jersey Mining earns 950 a share sells for 90 and pays 6 per

Jersey Mining earns $9.50 a share, sells for $90, and pays $6 per share dividend. The stock is split two for one and a $3 per shares cash dividend is declared.

a. What will be the new price of the stock?

b. If the firm\'s total earnings do not change, what is the payout ratio before and after the stock split?

Solution

a> new price = old price * reciprocal ratio of stock slpit = 90*1/2 = $ 45

b> Payout Ratio = Dividend per Share / Earnings per Share

=> payout ratio before the stock split

payout ratio = 6/9.5 = 63.16 %

payout ratio after the stock split

payout ratio = 3/4.75 = 63.16%