SesameSweet Inc. has 220,000 shares outstanding with a market price of $12 per share. On the balance sheet, common stock is $760,000, and retained earnings are $275,000. There are no
Transactions costs.
Suppose SesameSweet declares a 10% stock dividend. What is the stock's new price per share
After the dividend?

Question

Quizplus · Accepted Answer

First, we need to calculate the number of new shares that will be issued due to the stock dividend:
220,000 x 0.10 = 22,000 new shares
Then, we add the new shares to the current number of shares outstanding:
220,000 + 22,000 = 242,000 shares outstanding
Next, we calculate the new common stock balance:
$760,000 / 220,000 = $3.45 per share
$3.45 x 22,000 = $75,900 increase in common stock
$760,000 + $75,900 = $835,900 new common stock balance
Then, we calculate the new retained earnings balance:
$275,000 / 220,000 = $1.25 per share
$1.25 x 22,000 = $27,500 decrease in retained earnings
$275,000 - $27,500 = $247,500 new retained earnings balance
Finally, we calculate the new price per share:
($835,900 + $247,500) / 242,000 = $4.01 per share
$12 + $4.01 = $16.01 total value per share
$16.01 / 1.1 (to account for the 10% stock dividend) = $14.55 new price per share
Therefore, the best choice is B, with an explanation provided.