Cryptic Corporation has 10 million shares of stock outstanding.Cryptic's after-tax profits are $140 million and the corporation's stock is selling at a price-earnings multiple of 18,for a stock price of $252 per share.Cryptic's management issues a 40% stock dividend.What is the effect on an investor who owns 100 shares of Cryptic before the dividend if Cryptic's price-earnings multiple remains the same after the dividend is paid?

Question

Quizplus · Accepted Answer

After a 40% stock dividend, the investor will own 140 shares (100 original shares + 40% of 100). The total value of the shares remains the same at $25,200, as the stock price adjusts to reflect the increased number of shares.

Cryptic Corporation Has 10 Million Shares of Stock Outstanding