1. Summer Co. currently has 330,000 shares of stock outstanding that sell for $6

Question

1. Summer Co. currently has 330,000 shares of stock outstanding that sell for
$64 per share. Assuming no market imperfections or tax effects exist, what
will the share price be after:
   a) Summer has a five-for-three stock split?
   b) Summer has a 15% stock dividend?
   c) Summer has a four-for-seven reverse stock split?

2. Harley Co. has a current period cash flow of $1.1 million and pays no
dividends. The present value of the company’s future cash flows is $15
million. The company is entirely financed with equity and has 600,000
shares outstanding. Assume the dividend tax rate is zero.
   a) What is the share price?
   b) Suppose the board of directors announces its plan to pay out 50% of its current cash flows as cash dividends to its shareholders. How can Leon, who owns 1,000 shares of Harley stock, achieve a zero payout policy of his own?

Explanation / Answer

Answer-1:

a) For Five for three stock split:

Share price after split = $64 *3 /5 = $38.40 Per share

b) For 15% Stock Dividend :

Share price after split = $64 * /115% = $53.04 Per share

c) For four-for-seven reverse stock split:

Share price after split = $64 * 7/4 = $112 Per share

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