Question

UILIELS. Dividends and Share Repurchases 8. Stock dividends and stock splits Aa Aa El Companies sometimes consider stock splits to bring down the price so that the stock attracts more purchases. Consider the following case: sertificate of Sto Happy Monkey Manufacturing currently has 10,000 shares of common stock outstanding. Its management believes that its current stock price of $100 per share is too high. The company is planning to conduct stock splits in the ratio of 3 for 1 as described in the animation. If Happy Monkey Manufacturing declares a 3-for-1 stock split, what will be the price of the company's stock after the split, assuming that the total value of the firm's stock remains the same after the split, will be Scorecard Athletics Corp. is one of Happy Monkey's leading competitors. Scorecard's market intelligence research team shares Happy Monkey's plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Scorecard decide to offer stock dividends to its shareholders. If the firm pays a 5% stock dividend, what will be the total number of shares outstanding after the stock dividend? 2,535,750 shares 2,415,000 shares 2,294,250 shares 2,656,500 shares O Scorecard currently has 2,300,000 shares of common stock! outstanding

Answer 1

For a stock split, the total market capitalization always remains the same.

Initial market capitalization = No of shares * Current stock price = 10,000 * $100 = $1,000,000

For a 3 for 1 split,

No of shares will be = 10,000 * 3 = 30,000

Stock price of Happy Monkey Manufacturing = $100/3 = $33.33 or $1,000,000/30,000 = $33.33

Current number of shares of Scorecard Athletics = 2,300,000

Company pays 5% stock dividend, thus the total number of stocks will increase by 5%.

Thus, the total number of shares = 2,300,000 + 2,300,000*5% = 2,300,000 + 115,000 = 2,415,000 shares