Question

The board of directors of McKay Company has approved a 20% stock dividend. The firm currently has net income of $900,000. There are 300,000 common shares outstanding and the stock has a P/E ratio of 8. What will be the firm's common stock price after the stock dividend? Group of answer choices

Answer 1

Answer:

$20

Explanation:

Current Stock Price:

= (Net income ÷ common shares outstanding) × P/E ratio

= (900,000 ÷ 300,000) × 8

= $24

No of Stock Dividend issued:

= common shares outstanding × Percent of stock dividend approved

= 300,000 × 20%

= 60,000

No of Outstanding Sharing share after stock dividend:

= common shares outstanding + No. of Stock Dividend issued

= 300,000 + 60,000

= 360,000

Common stock price after the stock dividend:

= = (Net income ÷ common shares outstanding after stock dividend) × P/E ratio

= (900,000 ÷ 360,000) × 8

= $20