Question

Companies sometimes consider stock splits to bring down the price so that the stock attracts more...

Companies sometimes consider stock splits to bring down the price so that the stock attracts more purchases.

Consider the following case:

Tolbotics Inc. currently has 10,000 shares of common stock outstanding. Its management believes that its current stock price of $110 per share is too high. The company is planning to conduct stock splits in the ratio of 3 for 1 as described in the animation.

If Tolbotics Inc. declares a 3-for-1 stock split, 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   .

Fuzzy Muffin Manufacturing Company is one of Tolbotics’s leading competitors. Fuzzy Muffin Manufacturing Company’s market intelligence research team shares Tolbotics’s plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Fuzzy Muffin decide to offer stock dividends to its shareholders.

A stock dividend is another way of keeping the stock price from going too high. Fuzzy Muffin currently has 1,900,000 shares of common stock outstanding.

If the firm pays a 5% stock dividend, how many shares will the firm issue to its existing shareholders?

99,750 shares

95,000 shares

104,500 shares

90,250 shares

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