Question

Please expain the formula you are using and how you got the answers in detail.

Simmons Mineral Operations, Inc., (SMO) currently has 505,000 shares of stock outstanding that sell for $80 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:

a.SMO has a four-for-three stock split?

b.SMO has a 20 percent stock dividend?

c.SMO has a 42.5 percent stock dividend?

d.SMO has a three-for-seven reverse stock split?

e. Determine the new number of shares outstanding in parts (a) through (d).

Answer 1

In a split the share price decreases while the number of shares increases

a. in a four for 3 split, 4 shares are created for every 3 shares

so the new share price = 80*3/4 = 60

number of shares = 505,000*4/3 = 673,333.33

b. new share price = 80/(1+0.2) = 80/1.2 =66.67

number of shares = 505,000*1.2 = 606,000

c. new share price = 80/1.425 = 56.14

number of shares = 505,000*1.425 = 719,625

d. price of shares = 80*7/3 = 186.67 (in a split share number decreases)

nuber of shars = 505,000*3/7 = 216,428.57