Reference no: EM132621575

Kermit Inc. has 100,000 authorized shares, 10,000 issued and outstanding shares at a $1.00 par value, additional paid-in capital of $7,000, and retained earnings of $15,000. The market price of the stock is $50.00. In order to encourage potential investors, the board of directors is considering one of the following alternatives.

Issue a $5,000 cash dividend.

Issue a 10% stock dividend.

Issue a 35% stock dividend.

Issue a 4-for-3 stock split.

Instructions

Problem 1: If the firm issues the cash dividend, how much will total equity become?

Problem 2: If the firm issues the 10% stock dividend, how much will the retained earnings balance become?

Problem 3: If the firm issues the 35% stock dividend, how much will the retained earnings balance become?

Problem 4: If the firm issues the 4-for-3 stock split, how much will total equity become?

Problem 5: The financial manager is concerned that if the retained earnings balance is reduced, this might discourage potential investors. Based on this concern, in your opinion, which alternative should the firm employ and why?