Question

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)

Answer 1

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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