Express, Inc., has a total of 80,000 shares of common stock outstanding and no p
ID: 2383441 • Letter: E
Question
Express, Inc., has a total of 80,000 shares of common stock outstanding and no preferred stock. Total stockholders' equity at the end of the current year amounts to $5 million and the market value of the stock is $66 per share. At year-end, the company declares a 10 percent stock dividend—one share for each 10 shares held. If all parties concerned clearly recognize the nature of the stock dividend.
What should you expect the market price per share of the common stock to be on the ex-dividend date?
Express, Inc., has a total of 80,000 shares of common stock outstanding and no preferred stock. Total stockholders' equity at the end of the current year amounts to $5 million and the market value of the stock is $66 per share. At year-end, the company declares a 10 percent stock dividend—one share for each 10 shares held. If all parties concerned clearly recognize the nature of the stock dividend.
Explanation / Answer
Current Mkt Cap = No of shares outstanding*Mkt price per share = 80000*$66 = $5,280,000 If the board of directors approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held. SO Extra shares will be 10%*80000 = 8000. SO Total Shares outstanding will be 88000. Since every stockholder received additional shares, and since the corporation is no better off after the stock dividend, the value of each share should decrease. In other words, since the corporation is the same before and after the stock dividend, the total market value of the corporation remains the same. Because there are 10% more shares outstanding, however, each share should drop in value. SO Each share price = Total Mkt cap before Stock div/No of shares after stock div = $5,280,000/88,000 = $60. SO the market price per share of the common stock to be on the ex-dividend date will be $60
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