CHAPTER 18 PROBLEM 22

Matrix Corp., Inc. is considering a 15% stock dividend. The capital accounts are as follows:
Common stock (4,000,000 
shares at $10 par)		$40,000,000
Capital in excess of par*		15,000,000
Retained earnings		  45,000,000
Net worth		$100,000,000
*The increase in capital in excess of par as a result of a stock dividend is equal to the shares created times (Market price - Par value).
	The company- stock is selling for $40 per share. The company had total earnings of 12,000,000 with 4,000,000 shares outstanding and earnings per share were $3.00. The firm has a P/E ratio of 13.33.
a.	What adjustments would have to be made to the capital accounts for a 15 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 have if he or she originally had 100?
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 slight difference due to rounding.)
e.	Assume Ms. O’Donnell, the president of Matrix Systems, wishes to benefit stockholders by keeping the cash dividend at a previous level of $1.05 in spite of the fact that the stockholders now have 15 percent more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $40.
	What is an investor- total investment worth after the stock dividend if he/she had 100 shares before the stock dividend?
f.	Under the scenario described in part e, is the investor better off?
g.	As a final question, what is the dividend yield on this stock under the scenario described in part e?