Question

Suppose that you own 2,000 shares of Nocash Corp. and the company is about to pay a 25% stock dividend. The stock currently sells at $120 per share.

a. What will be the number of shares that you hold after the stock dividend is paid? (Do not round intermediate calculations.)

b. What will be the total value of your equity position after the stock dividend is paid? (Do not round intermediate calculations.)

c. What will be the number of shares that you hold if the firm splits five-for-four instead of paying the stock dividend? (Do not round intermediate calculations.)

Answer 1

Under stock dividend, new shares are issued in the form of dividend

a.Number of shares after stock dividend = Current number of shares + Number of shares*Stock Dividend %

= 2000 + 2000*25%

= 2,500 shares

b.price per share after stock dividend = Current price/(1+Stock Dividend %)

= 120/1.25

= $96 per share

Value of Equity = 2500*96

= $240,000

c.Under 5 for 4 split, the firm will issue 5 shares in place of every 4 held

Number of shares after split = 2000*5/4

= 2,500 shares