Companies sometimes consider stock splits to bring down the price so that the st

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 30,000 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 3 for 1 as described in the animation. If Mainway Toys Co. declares a 3 - 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 after the split? Hackworth Co. is one of Mainway 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. A stock dividend is another way of keeping the stock price from going too high. Hackworth Co. currently has 1,100,000 shares of common stock outstanding. If the firm pays a 5% stock dividend, how many shares will the firm issue to its existing shareholders? 49,500 shares 57,750 shares 55,000 shares 41,250 shares

Explanation / Answer

(1) Stock Split

In a 3-for-1 split, investors are given 2 stocks for every stock they own.

So, total number of shares after split = 30,000 x 3 = 90,000 (additional 60,000 shares)

New share price = (30,000 x $95) / 90,000 = $31.67

(2) Stock Dividend

A stock dividend of 5% signifies that an investor will be given 1 additional share for every 20 shares he already owns.

So, number of additional shares = 1,100,000 / 20 = 55,000 new shares

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