Chapter 14, Problem 6QP

a)

Summary Introduction

To determine: The share price after a 5-3 stock split.

Introduction:

A company divides its share into multiple shares and issues them to the shareholders as an additional share; as per the decisions by the management, it is termed as a stock split.

Answer to Problem 6QP

The share price is $56.4.

Explanation of Solution

Given information: BT Company has 420,000 shares of stock outstanding and sells at $94 per share with a stock split of 5-3.

The formula to calculate the share price:

$\text{New share price}=\text{Selling price}\times \text{Stock split ratio}$

Compute the new share price:

$\begin{array}{c}\text{New share price}=\text{Selling price}\times \text{Stock split ratio}\\ =\text{\$94}\times \frac{3}{5}\\ =\$56.4\end{array}$

Hence, the new share price is $56.4.

b)

Summary Introduction

To determine: The share price at 15% stock dividend.

Introduction:

Stock dividend: The distribution of dividends in the form of additional shares is termed as stock dividend. It is also termed as ‘Scrip dividend’.

Answer to Problem 6QP

The share price after a 15% stock dividend is $81.74.

Explanation of Solution

Given information:

BT Company has 420,000 shares of stock outstanding and sells at $94 per share with stock dividend of 15%.

The formula to calculate the share price:

$\text{New share price}=\text{Selling price}\times \left(\frac{1}{1+\text{Percentage of stock dividend}}\right)$

Compute new the share price:

$\begin{array}{c}\text{New share price}=\text{Selling price}\times \left(\frac{1}{1+\text{Percentage of stock dividend}}\right)\\ =\$94\times \left(\frac{1}{1+0.15}\right)\\ =\$94\times \left(\frac{1}{1.15}\right)\\ =\$81.74\end{array}$

Hence, the new share price is $81.74.

c)

Summary Introduction

To determine: The share price at 42.5% stock dividend.

Stock dividend: The distribution of dividends in the form of additional shares is termed as a stock dividend. It is also termed as ‘Scrip dividend’.

Answer to Problem 6QP

The share price after 42.5% stock dividend is $65.96.

Explanation of Solution

The formula to calculate the share price:

$\text{New share price}=\text{Selling price}\times \left(\frac{1}{1+\text{Percentage of stock dividend}}\right)$

Compute the new share price:

$\begin{array}{c}\text{New share price}=\text{Selling price}\times \left(\frac{1}{1+\text{Percentage of stock dividend}}\right)\\ =\$94\times \left(\frac{1}{1+0.425}\right)\\ =\$94\times \left(\frac{1}{1.425}\right)\\ =\$65.96\end{array}$

Hence, the new share price is $65.96.

d)

Summary Introduction

To determine: The share price after a 4-7 reverse stock split.

Introduction:

Reverse stock split is where the company reduces its shares, which are outstanding. It is the opposite of forward stock splits. This works normally as a regular dividend but reverse action will take place.

Answer to Problem 6QP

The share price is $164.5.

Explanation of Solution

Given information: BT Company has 420,000 shares of stock outstanding and sells at $94 per share, and declared reverse stock split of 4-7.

The formula to calculate the new share price:

$\text{New share price}=\text{Selling price}\times \text{Reverse stock split ratio}$

Compute the new share price:

$\begin{array}{c}\text{New share price}=\text{Selling price}\times \text{Reverse stock split ratio}\\ =\$94\times \frac{7}{4}\\ =\$164.5\end{array}$

Hence, the new share price is $164.5.

e).a)

Summary Introduction

To determine: The new number of shares outstanding.

Answer to Problem 6QP

The new number of shares outstanding is 700,000.

Explanation of Solution

Given information:

BT Company has 420,000 shares of stock outstanding and sells at $94 per share.

The formula to calculate the new number of outstanding shares:

$\text{New number of outstanding share}=\text{Existing share}\times \left(\frac{\text{New ratio}}{\text{Old ratio}}\right)$

Compute the new outstanding ratio:

$\begin{array}{c}\text{New number of outstanding share}=\text{Existing share}\times \left(\frac{\text{New ratio}}{\text{Old ratio}}\right)\\ =420,000\times \frac{5}{3}\\ =700,000\end{array}$

Hence, the new numbers of outstanding shares are 700,000.

b)

Summary Introduction

To determine: The new number of shares outstanding

Answer to Problem 6QP

The new number of shares outstanding is 483,000.

Explanation of Solution

The formula to calculate the new outstanding shares:

$\text{New number of outstanding shares}=\text{Existing shares}\times \left(1+\text{Percentage of stock dividend}\right)$

Compute the new number of shares outstanding:

$\begin{array}{c}\text{New number of outstanding shares}=\text{Existing shares}\times \left(1+\text{Percentage of stock dividend}\right)\\ =420,000\times 1.15\\ =483,000\end{array}$

Hence, the new numbers of outstanding shares are 483,000.

c)

Summary Introduction

To determine: The new number of shares outstanding

Answer to Problem 6QP

The new number of shares outstanding is 598,500.

Explanation of Solution

The formula to calculate the new number of outstanding shares:

$\text{New number of outstanding shares}=\text{Existing shares}\times \left(1+\text{Percentage of stock dividend}\right)$

Compute the new number of shares outstanding:

$\begin{array}{c}\text{New number of outstanding shares}=\text{Existing shares}\times \left(1+\text{Percentage of stock dividend}\right)\\ =420,000\times 1.425\\ =598,500\end{array}$

Hence, the new number of outstanding shares is 598,500.

d)

Summary Introduction

To determine: The new number of shares outstanding

Answer to Problem 6QP

The new number of shares outstanding is 240,000.

Explanation of Solution

The formula to calculate the new number of outstanding shares:

$\text{New number of outstanding shares}=\text{Existing share}\times \left(\frac{\text{New ratio}}{\text{Old ratio}}\right)$

Compute the new outstanding ratio:

$\begin{array}{c}\text{New number of outstanding shares}=\text{Existing share}\times \left(\frac{\text{New ratio}}{\text{Old ratio}}\right)\\ =420,000\times \frac{4}{7}\\ =240,000\end{array}$

Hence, the new number of outstanding shares is 240,000.