Jagdambay Exports has no debt outstanding and a total market value of $180,000.
ID: 1175027 • Letter: J
Question
Jagdambay Exports has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 30% lower. Jagdambay Exports is considering a $75,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. The tax rate is 35%. Based on the given information, please answer questions a and b.
Suppose the stock of Jagdambay Exports Corporation is currently trading at $20 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)
Explanation / Answer
a) Stock dividend of 20%
Assume number of shares outstanding were 1000.
So total market cap of the company = 1000 * $20 = $20000
Now, after stock dividend market cap remains constant, but number of shares outstanding increase.
Number of shares now outstanding = 1000 * (1 + 20%) = 1200
So price per share now = 20000/1200 = 16.67 --> Answer
b) a 3:2 stock split means, that for every 2 shares held, investors will get 3 shares. So if investor was holding 2 shares before split, post split it will hold 3 shares.
However, market value of his holding would remain same.
Pre-split Price * 2 = Post-Split price * 3
20 * 2/3 = Post-split price
Post-split price = 40/3 = 13.33 --> Answer to (b)
c) a 1:3 reverse stock split means, that for every 3 shares held, investors will get 1 share. So if investor was holding 3 shares before reverse split, post reverse split it will hold 1 share.
However, market value of his holding would remain same.
Pre-split Price * 3 = Post-Split price * 1
20 * 3/1 = Post-split price
Post-split price = 60 --> Answer to (c)
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