Outpost has 2 million shares of common stock outstanding; net income is $300,000; the P/E ratio is 9; and

management is considering an 18% stock dividend.

What will be the expected effect on the price of the common
stock? If an investor owns 300 shares in the company, how does this change his total value? Explain.

Before dividend:
Shares outstanding 2,000,000
Net income $300,000
EPS $0.15
Price/Earnings 9
Current price $1.35 = $0.15 × 9
Investor's shares 300
Value before dividend $405.00 = $1.35 × 300 shares
After dividend:
Shares outstanding 2,360,000 = 2,000,000 × (1 + 0.18)
New EPS $0.127
New price $1.144 = $0.127 × 9
Investor's shares 354 = 300 × 1.18
Value after dividend $405.00 = 354 × $1.144
Change $ 0.00 = $405(before)
405 (after)
The total value of the investors' holdings does not change because the price of the stock reacted fully to the increase in
the shares outstanding.