Chapter 17, Problem 4QP

a)

Summary Introduction

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

Introduction:

Stock split: RR Corporation divides its share into multiple shares and issues them to the shareholders as an additional share, as per the decisions of the management is termed as stock split.

Answer to Problem 4QP

The share price is $48.

Explanation of Solution

Given information:

RR Corporation has 425,000 shares of stock outstanding, and sells at $80 per share with 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:

$\begin{array}{c}\text{New share price}=\text{Selling price}\times \text{Stock split ratio}\\ =\text{\$80}\times \frac{3}{5}\\ =\$48\end{array}$

Hence, the new share price is $48.

b)

Summary Introduction

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

Introduction:

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

Answer to Problem 4QP

The share price after 15% stock dividend is $69.56.

Explanation of Solution

Given information:

RR Corporation has 425,000 shares of stock outstanding, and sells at $80 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 the new share price:

$\begin{array}{c}\text{New share price}=\text{Selling price}\times \left(\frac{1}{1+\text{Percentage of stock dividend}}\right)\\ =\$80\times \left(\frac{1}{1+0.15}\right)\\ =\$80\times \left(\frac{1}{1.15}\right)\\ =\$69.56\end{array}$

Hence, the new share price is $69.56.

c)

Summary Introduction

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

Introduction:

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

Answer to Problem 4QP

The share price after 42.5% stock dividend is $.56.140.

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:

$\begin{array}{c}\text{New share price}=\text{Selling price}\times \left(\frac{1}{1+\text{Percentage of stock dividend}}\right)\\ =\$80\times \left(\frac{1}{1+0.425}\right)\\ =\$86\times \left(\frac{1}{1.425}\right)\\ =\$56.140\end{array}$

Hence, the new share price is $56.140.

d)

Summary Introduction

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

Introduction:

Reverse stock split: The Company reduces its share, 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 4QP

The share price is $140.

Explanation of Solution

Given information:

RR Corporation has 425,000 shares of stock outstanding, sells at $80 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 new share price:

$\begin{array}{c}\text{New share price}=\text{Selling price}\times \text{Reverse stock split ratio}\\ =\$80\times \frac{7}{4}\\ =\$140\end{array}$

Hence, the new share price is $140.

a)

Summary Introduction

To determine: The new number of shares outstanding in parts (a) through (b).

Answer to Problem 4QP

The new number of outstanding shares is 708,333.33.

Explanation of Solution

The formula to calculate the new number of outstanding share:

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

Compute the new outstanding ratio:

$\begin{array}{c}\text{New number of outstanding share}=\text{Existing share}\times \left(\frac{\text{New ratio}}{\text{Old ratio}}\right)\\ =425,000\times \frac{5}{3}\\ =708333.33\end{array}$

Hence, the new number of outstanding shares is 708,333.33.

b)

Summary Introduction

To determine: New number of outstanding shares.

Answer to Problem 4QP

The new number of outstanding shares is 488,750.

Explanation of Solution

The formula to calculate the new outstanding share:

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

Compute the new number of outstanding shares:

$\begin{array}{c}\text{New number of outstanding share}=\text{Existing shares}\times \left(1+\text{Percentage of stock dividend}\right)\\ =425,000\times 1.15\\ =488,750\end{array}$

Hence, the new number of outstanding shares is 488,750.

c)

Summary Introduction

To determine: New number of outstanding shares.

Answer to Problem 4QP

The new number of outstanding shares is 605,625.

Explanation of Solution

The formula to calculate the new number of outstanding share:

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

Compute the new number of outstanding share:

$\begin{array}{c}\text{New number of outstanding share}=\text{Existing shares}\times \left(1+\text{Percentage of stock dividend}\right)\\ =425,000\times 1.425\\ =605,625\end{array}$

Hence, the new number of outstanding shares is 605,625.

d)

Summary Introduction

To determine: New number of outstanding shares.

Answer to Problem 4QP

The new numbers of shares outstanding are 242,857.14.

Explanation of Solution

The formula to calculate the new number of outstanding share:

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

Compute the new outstanding ratio:

$\begin{array}{c}\text{New number of outstanding share}=\text{Existing share}\times \left(\frac{\text{New ratio}}{\text{Old ratio}}\right)\\ =425,000\times \frac{4}{7}\\ =242857.14\end{array}$

Hence, the new numbers of outstanding shares are 242,857.14.