Question

Happy Monkey Manufacturing currently has 20,000 shares of common stock outstanding. Its management believes that its current stock price of $90 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. If Happy Monkey Manufacturing declares a 3-for-l 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. Scorecard currently has 1, 900,000 shares of common stock outstanding. If the firm pays a 6% stock dividend, what will be the total number of shares outstanding after the stock dividend?
a. 2, 215, 400 shares
b. 2, 014,000 shares
c. 1, 812, 600 shares
d. 1, 711, 900 shares

Answer 1

Answer:

1) $30

2) 2,014,000 shares

Explanation:

1). A 4 for 1 stock split means that for every one stock outstanding, there would be two stocks outstanding port the split. However, the value of the firm is not increased here. So, the value of firm won't change

Value of firm pre-split = Value of firm post-split

Therefore,

Number of shares pre-split * Share Price pre-split = Number of shares post-split * Share Price post-split

1 * $90 = 3 * Share price post-split

Solve for share price post slip:

Share price post-split = $90/3 = $30

2) Number of shares post stock dividend = Number of shares pre stock dividend * (1 + Dividend %)

Number of shares post stock dividend = 1,900,000 * (1 + 6%) = 2,014,000 shares