In the spring of 2014 the CFO of Placebo Pharmaceuticals, Inc. took a proposal to the firmâ€™s board of directors to distribute a noncash dividend to the firmâ€™s shareholders in the form of new shares of common stock. Specifically, the CFO proposed that the company pay 0.025 shares of stock to the holders of each share of common stock such that the holder of 1,000 shares of stock would receive an additional 25 shares of common stock.
a. If Placebo had total net income for the year of $ 10,000,000 and 20,000,000 shares of common stock outstanding before the stock dividend, what are firm earnings per share?
b. After paying the stock dividend, what is the firmâ€™s earnings per share?
c. If you owned 1,000 shares of stock before the stock dividend, how many dollars of earnings did the firm earn on your 1,000 share investment? After the stock dividend is paid, how many dollars of earnings did the firm earn on your larger share holdings? What effect would you expect from the payment of the stock dividend on your total investment in the firm?