During the year ended December 31, 2017, Liberty Inc. reported the following equity events: March 31, 2017 10 percent stock dividend April 15, 2017 $1 cash dividend per share June 30, 2017 Three-for-one stock split October 15, 2017 $0.60 cash dividend per share
The equity section of Liberty's balance sheet on December 31, 2016 was as follows:
Common shares (unlimited number of shares
10,000,000 authorized, 1,000,000 issued and outstanding)... $ 5,750,000
Retained earnings................... 12,450,000
Net income for fiscal 2017 was............. $3,500,000.
In previous years, Liberty paid its share holders annual dividends of $2.50 per share.
a. Prepare Liberty's shareholders' equity section on December 31, 2017.
b. Calculate basic earnings per share for 2017. What would EPS have been if the stock split and stock dividend had not occurred?
c. As a Liberty shareholder, what is your reaction to the reduction in the per share dividend from $2.50 per share to $1.60 per share?
d. The market value of Liberty's shares on December 31, 2017 was $18.20 per share.
What do you estimate the market price of the shares would have been had the stock dividend and stock split not occurred? Explain your answer.
e. Calculate Liberty's price-to-book ratio on December 31, 2017. What would the price-to-book ratio have been had the stock split and stock dividend not occurred?
f. What would Liberty's dividend payout ratio be for 2017 and the dividend yield on December 31, 2017? How would these amounts be affected by the stock dividend and stock split?