(Stock dividends) in the spring of 2014 the CFO of Placebo Pharmaceutical Inc.
took a proposal to the firms board of directors to distribute a noncash dividend to the firms
shareholders in the form of new shares of common stock. Specifically, the CFO proposed that the
company pay 0.015 shares of stock to the holders of each share of common stock that the holder
of 1,000 shares of stock would receive an additional 15 shares of common stock.
a. If placebo had total net income for the year of $10,000,000 and 21,000,000 shares of
common stock outstanding before the stock dividend, what are the firms earnings per
b. After paying the stock dividend, what are the firms earnings per share?
c. If you owned 1,000 shares of stock before the stock dividend, how many dollars of
earnings did the firm earn on your 1,000 share investment? After the stock dividend is
paid, how many dollars of earnings did the firm earn on your larger share holding? What
effect would you expect from the payment of the stock dividend on your total investment
in the firm?