Company Oakland has 100 shares of common stock outstanding. Its current stock pr

Question

Company Oakland has 100 shares of common stock outstanding. Its current stock price is $10 per share. Its current book value is $800. Assuming there are no personal income taxes or transaction costs, answer the following questions (i) – (Iii).

(i) If the company declares a 100% stock dividends, what would be the (a) share price, (b) number of shares outstanding, (c) book value of equity, and (d) market value of equity after the stock dividends?

(ii) If the company declares a 2-for-1 stock split, what would be the (a) share price, (b) number of shares outstanding, (c) book value of equity, and (d) market value of equity after the stock split?

(iii) If the company declares a 1-for-2 reverse stock split, what would be the (a) share price, (b) number of shares outstanding, (c) book value of equity, and (d) market value of equity after the reverse stock split?

Explanation / Answer

(i) If the company declares a 100% stock dividends, what would be the

(a) share price = 10

(b) number of shares outstanding = 100 share + 100%*100 = 200 share

(c) book value of equity = $ 800

(d) market value of equity after the stock dividends = 200*10 = $ 2000

(ii) If the company declares a 2-for-1 stock split, what would be the

(a) share price, = 10*1/2 = 5

(b) number of shares outstanding, = 100*2 = 200

(c) book value of equity = $ 800

and (d) market value of equity after the stock split = 200*5 = $ 1000

(iii) If the company declares a 1-for-2 reverse stock split, what would be the

(a) share price = 10 * 2 = $ 20

(b) number of shares outstanding = 100*1/2 = 50

(c) book value of equity = $ 800

(d) market value of equity after the reverse stock split = 20*50 = $ 1000

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