A Firm consists of 250 grocery stores throughout the Midwest. At the beginning of 2010 its statement

Question:

A Firm consists of 250 grocery stores throughout the Midwest. At the beginning of 2010 its statement of net worth showed the following information: Common Stock ($2 par) $800,000; Capital paid in excess of par $1,400,000 and retained earnings $500,000. During the year, net income equaled $160,000. Management was undecided on what to do with the income. Acme paid an annual dividend of $.25 per share last year and the stock price is currently $14.50. Acme has a 6% growth rate in earnings and dividends, and is in the 40% tax bracket.

(a) What return on investment would Acme have to earn in order to justify retaining 2010's earnings? Use the formula: Ke = D1/P0 + g

(b) What changes would occur in stockholder's equity if a $.15 cash dividend was paid? If a 5% stock dividend was given and no cash dividend was paid?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...