ACME Corporation consists of 250 grocery stores throughout the Midwest. At the beginning of 2008 its statement of net worth showed the following information: Common Stock ($1 par) $400,000; 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 $.35 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 $.25 cash dividend was paid? If a 5% stock dividend was given and no cash dividend was paid?
c) What would EPS be before and after the stock dividend?
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