Pat Short, President of Prime Cuts Inc., is contemplating issuing a stock dividend that would lower the company’s share price to between $23 and $25 per share. Prime Cuts’ stock is currently trading at $45.00 per share. The shareholders’ equity section of Prime Cuts’ balance sheet at year-end is as follows:

Common stock ($1 par)	$1,125,000
Additional paid-in-capital	3,375,000
Retained earnings	6,210,000
Total shareholders’ equity	$10,710,000

For the past several years, Prime Cuts has paid annual cash dividends of $0.08 per share. Pat would like to maintain this level of cash dividends after the stock dividend is issued. Pat expects net income for the next few years to average $300,000 per year.

1. Answer the below questions to identify how the company’s financial statements would be affected by a 20% stock dividend.
Shares outstanding increases by: 

Retained earnings declines by: $
Common stock at par increases by: $
APIC increases by: $

2. Answer the below questions to assess how the market will react to the announcement of a 20% stock dividend.
At the time of the dividend, the stock price will increase, decrease, or remain unchanged? 

 Increase Decrease Remain unchanged
At the time of the dividend, the shareholder's wealth will increase, decrease, or remain unchanged? 

Increase Decrease Remain unchanged

3. If the market has already priced in the company’s future prospects, what would the company’s stock price be after the 20% stock dividend? $

4. Answer the below questions to assess the financial effects of a 3/2 stock split.
A 3/2 stock split would increase the number of shares outstanding by what percent? %
A 3/2 stock split would reduce the par value of the shares to: $
A 3/2 stock split would cause the balance sheet account values to increase, decrease, or remain unchanged? 

Increase Decrease Remain unchanged

Answer rating: 100% (QA)

Answer 1 Answer the below questions to identify how the companys financial statements would be affec... View the full answer