Cyberco Corporation has 5 million shares of stock outstanding. Cyberco's after-tax profits are $15 million and
the corporation's stock is selling at a price-earnings multiple of 10, for a stock price of $30 per share.
Cyberco
management issues a 25% stock dividend.
a. Calculate Cyberco's earnings per share before and after the stock dividend.
b. Suppose an investor owns 100 shares of Cyberco before the stock dividend. Use the price earnings multiple
to estimate the value of the investor's holdings both before and after the dividend.
c. Comment on the results of the stock dividend for current shareholders.
a.
Before: EPS = $15 million /52 million shares = $3 per share
After: EPS = $15 million /6.255 million shares = $2.4 per share
b.
Price of the stock before the stock dividend = P/E × EPS = 10 × $3 = $30
Price of the stock after the stock dividend = P/E × EPS = 10 × $2.4 = $24
Value of investor's holdings before the stock dividend: 100 shares × $30 = $3,000
Value of investor's holdings after the stock dividend: 125 shares × $24 = $3,000
c.
The stock dividend did not change the value of the shareholder's investment. This will be true as long as the stock split
does not change investors' estimates of future performance.
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