CHAPTER 18 PROBLEM 21

Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend. The capital accounts for the firm are as follows:
Common stock (2,000,000 
shares at $5 par)		$10,000,000
Capital in excess of par*		6,000,000
Retained earnings		  24,000,000
Net worth		$40,000,000
*The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times (Market price - Par Value).
	The company- stock is selling for $20 per share. The company had total earnings of $4,000,000 during the year. With 2,000,000 shares outstanding, earnings per share were $2.00. The firm has a P/E ratio of 10.
a.	What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts.
b.	What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.)
c.	How many shares would an investor end up with if he or she originally had 100 shares?
d.	What is the investor- total investment worth before and after the stock dividend if the P/E ratio remains constant? (There may be a $1 to $2 difference due to rounding.)
e.	Has Ace Products pulled a magic trick, or has it given the investor something of value? Explain.