| Share Valuation |
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| The board of Santova Ltd is exploring ways to expand the number of shares outstanding in an effort to 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, alternatively, a 5-for-4 stock split. |
| At the same time, the firm’s equity account and other per-share information are as follows: |
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| Preferred stock |
0 |
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| Common stock ( 100,000 shares at R1 par) |
100000 |
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| Paid-in capital in excess of par |
900000 |
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| Retained earnings |
700000 |
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| Total stockholders’ equity |
1700000 |
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| Share price |
R30 |
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| EPS |
R3,60 |
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| DPS |
R1,08 |
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| P/E |
R8,33 |
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| a) Show the effects on the equity account, EPS and P/E ratio of a 20% of a stock dividend. |
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| After stock 20% dividend |
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| Preferred stock |
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| Common stock ( ) |
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[2] |
| Paid-in capital in excess of par |
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[2] |
| Retained earnings |
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[2] |
| Total stockholders’ equity |
0 |
[2] |
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| Change in price |
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[1] |
| Net Income |
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[1] |
| Change in EPS |
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[1] |
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| b) Show the effect on the equity accounts, EPS and P/E ratio of a 5-for-4 stock split. |
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| After 5-for-4 stock split |
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| Preferred stock |
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| Common stock ( ) |
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[2] |
| Paid-in capital in excess of par |
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[2] |
| Retained earnings |
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[2] |
| Total stockholders’ equity |
0 |
[2] |
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| Change in price |
|
[1] |
| Change in EPS |
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[1] |
| Change in the number of Outstanding shares |
|
[1] |
