Security Data Company has outstanding 50,000 shares of

 

common stock currently selling at $40 per share. The firm most recently had earnings

available for common stockholders of $120,000, but it has decided to retain

these funds and is considering either a 5% or a 10% stock dividend in lieu of a cash

dividend.

a. Determine the firm’s current earnings per share.

b. If Sam Waller currently owns 500 shares of the firm’s stock, determine his proportion

of ownership currently and under each of the proposed stock dividend

plans. Explain your findings.

c. Calculate and explain the market price per share under each of the stock dividend

plans.

d. For each of the proposed stock dividends, calculate the earnings per share after

payment of the stock dividend.

e. What is the value of Sam’s holdings under each of the plans? Explain.

f. Should Sam have any preference with respect to the proposed stock dividends?

Why or why not?