Quiz

Question #1
Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock
currently sells for $4 per share.

Preferred stock $ 100,000

Common stock (400,000 shares at $1 par) 400,000
Paid-in capital in excess of par 200,000
Retained earnings 320,000
Total stockholders’ equity $1,020,000

a. Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share.
b. Show the effects on the firm of a 1%, 5%, 10%, and 20% stock dividend.
c. Compare the effects in parts a and b. What are the significant differences between the two
methods of paying dividends?

Question #2
The board of Wicker Home Health Care, Inc., is exploring ways to expand the number of shares
outstanding in an effort to reduce the market price per share to a level that the firm considers
more appealing to investors. The options under consideration are a 20% stock dividend and,
alternatively, a 5-for-4 stock split. At the present time, the firm’s equity account and other per-
share information are as follows:

Preferred stock $ 0
Common stock (100,000 shares at $1 par) 100,000
Paid-in capital in excess of par 900,000
Retained earnings 700,000
Total stockholders’ equity $1,700,000
Price per share $30.00
Earnings per share $3.60
Dividend per share $1.08

a. Show the effect on the equity accounts and per-share data of a 20% stock dividend.
b. Show the effect on the equity accounts and per-share data of a 5-for-4 stock split.
c. Which option will accomplish Wicker’s goal of reducing the current stock price while
maintaining a stable level of retained earnings?
d. What legal constraints might encourage the firm to choose a stock split over a stock dividend?