Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows: Common stock (4,000,000 shares at $10 par) $40,000,000
Capital in excess of par* 25,000,000 Retained earnings 45,000,000
Net worth $110,000,000

The increase in capital in excess of par as a result of a stock dividend is equal to the shares created times (Market price – Par value). The company’s stock is selling for $45 per share. The company had total earnings of $12,000,000 with 4,000,000 shares outstanding and earnings per share were $3.00. The firm has a P/E ratio of 15.

Required:
a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend?
b. What adjustments would be made to EPS and the stock price?
c. How many shares would an investor have if he or she originally had 90?
d. What is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant?