Q2) Suppose you work for Shah Corporation as a Chief Financial Officer (CFO). Also suppose the stock of Shah Corporation is currently trading at $25 per share.
a) If company issued a 20% stock dividend, what will its new price be? (1 Point)
b) If company does a 3:2 stock split, what will its new share price be? (1 Point)
c) If company does a 1:3 reverse split, what will its new share price be? (1 Point)
We can calculate the desired result as follows:
a) Price per share = $ 25
Stock Dividend per share = 20%
New price per share = Price before dividend / ( 1 + Stock dividend rate )
= 25 / ( 1 + 20% )
= 25 / 1.20
= $ 20.83 per share
b) New share price if company does a 3:2 stock split is:
= Existing Price per share / Share split ratio
= Existing Price per share / (3 / 2)
= 25 / 1.5
= $ 16.67 per share
c) New share price if company does a 1:3 reverse split is
= Existing Price per share / Reverse Share split ratio
= Existing Price per share / ( 1 / 3 )
= 25 * 3
= $ 75 per share
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