Question

10. 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: Mainway Toy Company currently has 30,000 shares of common stock outstanding. Its management believes that its current stock price of $95 per share is too high. The company is planning to conduct stock splits in the ratio of 4 for 1 as described in the animation. 4 for 1 Stock split announcement r icate er -

Answer 1

Question 1:

Stock split implies is a decision by company to increase number of shares that are outstanding by issuing more shares to current shareholders. Now, in a 4-for-1 stock split, for every 1 stock outstanding, now there would be 4 stocks outstanding. But this stock decision does not lead to any change in value of the firm.

Number of stock outstanding pre-split * Price before split = Number of stock outstanding post-split * Price post split

1 * $95 = 4 * Price post split

Price post split = $95/4 = $23.75

Question 2:

New Number of Stock outstanding = Old number of stock outstanding * (1 + Stock Dividend%)

New Number of Stock outstanding = 1,300,000 * (1 + 6%)

New Number of Stock outstanding = 1,300,000 * 1.06 = 1,378,000 shares