Question

4. Roll Corp. (RC) currently has 510,000 shares of stock outstanding that sell for $90 per share. Assuming no market imperfections or tax effects exist, determine the share price and new number of shares outstanding if

a. RC has a four-for-three stock split.

b. RC has a 10 percent stock dividend.

c. RC has a 43.50 percent stock dividend.

d. RC has a four-for-seven reverse stock split.

Answer 1

Ans-4-(a)

In a stock split only the number of outstanding shares change and not the market capitalization as this plit brings no value add and is only meant to keep the share price at a convinient trading level/stock.

Current Maket Capitalization of RC = Outstanding Shares * Share Price = 510000*90 = 459000000

Post for-for-three stock split number of shares Outstanding = 510000*4/3 = 680000

Since Market Cap will remain unchanged , Price / Share will be = 459000000 / 680000 = 67.50

Ans-4-(b)

A 10% stock dividend means the number of outstanding shares will go up by 10%

Outstanding stocks after dividend = 510000 + 510000*10% = 561000

Market Cap =  510000*90 = 459000000

The new Stock price = 459000000 / 561000 = 81.81

Ans-4-(c)

Outstanding stocks after dividend = 510000 + 510000*43.50% = 731850

Market Cap =  510000*90 = 459000000

The new Stock price = 459000000 / 731850 = 62.72

Ans-4-(d)

In reverse stock split the number of outstanding shares will get reduced

New number of outstanding shares with four-for-seven split = 510000*4/7 = 291429

Price per share = 459000000 / 291429 = 157.50