Roll Corporation (RC) currently has 510,000 shares of stock outstanding that sel

Question

Roll Corporation (RC) currently has 510,000 shares of stock outstanding that sell for $90 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:
  
a. RC has a four-for-three stock split? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
New share price   $
  
b. RC has a 10 percent stock dividend? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
New share price   $
  
c. RC has a 43.5 percent stock dividend? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
New share price   $
  
d. RC has a four-for-seven reverse stock split? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
New share price   $
  
e. Determine the new number of shares outstanding in parts (a) through (d). (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
  

a. New shares outstanding b. New shares outstanding c. New shares outstanding d. New shares outstanding

Explanation / Answer

a) four-for-three stock split means that for every 3 stocks outstanding, there will now be 4 stocks.

This means,

3 stocks would now be 4 stocks

So, 510,000 stocks would be =510,000 * 4/3 = 680,000

Now, market cap of the company remains same. (Market cap = number of shares outstanding * price per share)

=> 510,000 * 90 = 680,000 * Price post split

Price post split = 90 * 510,000/680,000 = $67.5

b) 10% stock dividend

This means for every stock outstanding/held, company will issue 0.1 (10%) stock.

So, number of new stocks issued = 510,000 * 10% = 51,000

Total outstanding shares = 510,000 + 51,000 = 561,000

Now, market cap of the company remains same.

=> 510,000 * 90 = 561,000 * Price post stock-dividend

Price post stock dividends = $81.82

c) 43.5% stock dividend

This means for every stock outstanding/held, company will issue 0.435 (43.5%) stock.

So, number of new stocks issued = 510,000 * 43.5% = 221,850

Total outstanding shares = 510,000 + 221,850 = 731,850

Now, market cap of the company remains same.

=> 510,000 * 90 = 731,850 * Price post stock-dividend

Price post stock dividends = $62.72

d) four-for-seven reverse stock split implies that for every 7 shares outstanding, there will now be 4 shares.

7 stocks would now be 4 stocks

So, 510,000 stocks would be =510,000 * 4/7 = 291,428.6 shares = 291,429 shares

Now, market cap of the company remains same.

=> 510,000 * 90 = 291,429 * Price post split

Price post-split = $157.5

e) Number of shares outstanding in each case:

Case a: 680,000

Case b: 561,000

Case c: 731,850

Case d: 291,429

(Explained above)

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