Chapter 19, Problem 4QP

Stock Splits and Stock Dividends Roll Corporation (RC) currently has 465,000 shares of stock outstanding that sell for $73 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:

1. a. RC has a five-for-three stock split?
2. b. RC has a 15 percent stock dividend?
3. c. RC has a 42.5 percent stock dividend?
4. d. RC has a four-for-seven reverse stock split?

Determine the new number of shares outstanding in parts (a) through (d).

Summary Introduction

To determine: The share price and new number of shares outstanding at 5/3 stock split.

Introduction: The term dividends allude to that portion of proceeds of an organization which is circulated by the organization among its investors. It is the remuneration of the investors for investments made by them in the shares of the organization.

Answer to Problem 4QP

The share price is $43.80 and new number of shares outstanding is 775,000 shares at 5/3 stock split.

Explanation of Solution

Determine the share price at 5/3 stock split

$\begin{array}{c}Share\mathrm{Pr}ice=\left[CurrentShare\mathrm{Pr}ice\times StockSplit\right]\\ =\left[\$73\times \left(\frac{3}{5}\right)\right]\\ =\$43.80\end{array}$

Therefore the share price at 5/3 stock split is $43.80.

Determine the number of shares outstanding at 5/3 stock split

$\begin{array}{c}NumberofSharesOuts\tan ding=\left[StocksOuts\tan ding\times StockSplit\right]\\ =\left[465,000\times \left(\frac{5}{3}\right)\right]\\ =775,000shares\end{array}$

Therefore the number of shares outstanding at 5/3 stock split is 775,000 shares.

Summary Introduction

To determine: The share price and new number of shares outstanding at 15% stock dividend.

Answer to Problem 4QP

The share price is $63.48 and new number of shares outstanding is 534,750 shares at 15% stock dividend.

Explanation of Solution

Determine the share price at 15% stock dividend

$\begin{array}{c}Share\mathrm{Pr}ice=\left[CurrentShare\mathrm{Pr}ice\times \left(\frac{1}{\left(1+StockDividend\right)}\right)\right]\\ =\left[\$73\times \left(\frac{1}{\left(1+15\%\right)}\right)\right]\\ =\left[\$73\times 0.869565\right]\\ =\$63.4782or\$63.48\end{array}$

Therefore the share price at 15% stock dividend is $63.48.

Determine the number of shares outstanding at 15% stock dividend

$\begin{array}{c}NumberofSharesOuts\tan ding=\left[StocksOuts\tan ding\times \left(1+StockDividend\right)\right]\\ =\left[465,000\times \left(1+15\%\right)\right]\\ =\text{534,750}shares\end{array}$

Therefore the par value of per share at 15% stock dividend is 534,750 shares.

Summary Introduction

To determine: The share price and new number of shares outstanding at 42.5% stock dividend.

Answer to Problem 4QP

The share price is $51.23 and new number of shares outstanding is 662,625 shares at 42.5% stock dividend.

Explanation of Solution

Determine the share price at 42.5% stock dividend

$\begin{array}{c}Share\mathrm{Pr}ice=\left[CurrentShare\mathrm{Pr}ice\times \left(\frac{1}{\left(1+StockDividend\right)}\right)\right]\\ =\left[\$73\times \left(\frac{1}{\left(1+42.5\%\right)}\right)\right]\\ =\left[\$73\times 0.701754\right]\\ =\$51.22807or\$51.23\end{array}$

Therefore the share price at 42.5% stock dividend is $51.23.

Determine the number of shares outstanding at 42.5% stock dividend

$\begin{array}{c}NumberofSharesOuts\tan ding=\left[StocksOuts\tan ding\times \left(1+StockDividend\right)\right]\\ =\left[465,000\times \left(1+42.5\%\right)\right]\\ =\text{662,625}shares\end{array}$

Therefore the par value of per share at 42.5% stock dividend is 662,625 shares.

Summary Introduction

To determine: The share price and new number of shares outstanding at 4/7 reverse stock split.

Answer to Problem 4QP

The share price is $127.75 and new number of shares outstanding is 265,714 shares at 4/7reverse stock split.

Explanation of Solution

Determine the share price at 4/7 reverse stock split

$\begin{array}{c}Share\mathrm{Pr}ice=\left[CurrentShare\mathrm{Pr}ice\times StockSplit\right]\\ =\left[\$73\times \left(\frac{7}{4}\right)\right]\\ =\$127.75\end{array}$

Therefore the share price at 4/7 reverse stock split is $127.75.

Determine the number of shares outstanding at 4/7 reverse stock split

$\begin{array}{c}NumberofSharesOuts\tan ding=\left[StocksOuts\tan ding\times StockSplit\right]\\ =\left[465,000\times \left(\frac{4}{7}\right)\right]\\ =\text{265,714}\text{.28}\text{or}265,714shares\end{array}$

Therefore the number of shares outstanding at 4/7 reverse stock split is 265,714 shares,