Question

CH 14:

5. Stock dividends and stock splits

Companies sometimes consider stock splits to bring down the price so that the stock attracts more purchases.

Consider the following case:

Tolbotics Inc. currently has 30,000 shares of common stock outstanding. Its management believes that its current stock price of $110 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. (ANIMATION SPLITS $12 CERTIFICATE INTO THREE (3) $4.00 Certificates.)

If Tolbotics Inc. declares a 3-for-1 stock split, 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:

A:$36.67 B:$220.00 C:$330.00 D:$440.00 or E:$55.00 .

Scorecard Athletics Corp. is one of Tolbotics’s leading competitors. Scorecard Athletics Corp.’s market intelligence research team shares Tolbotics’s plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Scorecard decide to offer stock dividends to its shareholders.

A stock dividend is another way of keeping the stock price from going too high. Scorecard currently has 1,900,000 shares of common stock outstanding.

If the firm pays a 5% stock dividend, how many shares will the firm issue to its existing shareholders?

A: 95,000 shares

B: 90,250 shares

C: 104,500 shares

D: 80,750 shares

Answer 1

Given,
Shares outstanding	30000
Price/share	$110
Tolbotics Inc has a three-for-one stock split
This means for every 1 shares the investor will get 3 shares but the market capitalisation will remain the same i.e. price after stock split will reduce since the number of shares outstanding increases.
Shares outstanding	30000*(3/1)
	90000
Price after split	110*(1/3)
	$36.67
Answer	$36.67 (Option A)
Scorecard has a 5% stock dividend
Given,
Shares outstanding	1,900,000
By stock dividend the number of shares outstanding increases reducing per share market price, market capitalisation remains the same
No of shares to be issued	Shares outstanding*stock dividend announced
	1900000*5%
	95000 shares
Answer	95000 shares (Option A)