Companies sometimes consider stock splits to bring down the price so that the st
ID: 2612677 • Letter: C
Question
Companies sometimes consider stock splits to bring down the price so that the stock attracts more purchases. Consider the case of Mainway toys Co.: Mainway Toys Co. currently has 25,000 shares of common stock outstanding. Its management believes that its current stock price of $95 per share is too high. The company is planning to conduct stock splits in the ratio of 2 for 1 as described in the animation. If Mainway Toys Co declares a 2-for-1 stock split, what will be the price of the company's stock after the split, assuming that the total value of the firm's stock remains the same alter the split? Mackworth Co is one of Manway Toys Co.'s leading competitors. Hackworth Co.'s market intelligence research team shares Mainway Toys Co's plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Hackworth Co decide to offer stock dividends to its shareholders. Hackworth Co. Currenty has 1,300,000 shares of common stock outstanding. If the firm pays a 3% stock dividend, what will be the total number of shares outstanding after the stock dividend?Explanation / Answer
1) Mainways Toy co
Total Market value before Split = 95*25000 = 2375000
Outstanding Share after split= 25000*2 = 50000
Total Market value after Split = Total Market value before Split = $ 2375000
Price of the companys stock after the split =Total Market value after Split /Outstanding Share after split
Price of the companys stock after the split = 2375000/50000
Price of the companys stock after the split = $ 47.50
2) Hackworth co
Total No of Share Outstanding after stock dividend = Outstanding Share + 3%* Outstanding Share
Total No of Share Outstanding after stock dividend = 1300000+ 3%*1300000
Total No of Share Outstanding after stock dividend = 1339000 Shares
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