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

Company Oakland has 100 shares of common stock outstanding. Its current stock price is $10 per share. Its current book value is $800. Assumption Share par value at $1 per share and market is given at $10 per share

(i) If the company declares a 100% stock dividends, then total number of shares of common stock outstanding are =100 + 100= 200, so (a) share price= remains same say $1 (par value) ,

(b) number of shares outstanding = 200 shares ,

(c) book value of equity= Total $800 and $4 per share, and

(d) market value of equity after the stock dividends= remains same at $10 per share as the stock dividend is always at market value.

(ii) If the company declares a 2-for-1 stock split, then the number of shares increases in volume from 100 shares to 200 shares & par value,say $1, reduced to half i.e. $0.50. Then the

(a) share price= $0.50 par value and share market price reduces to $5 from $10,

(b) number of shares outstanding= 200 shares,

(c) book value of equity= remain same in total $800 & reduced to half per share, $4 from $8

and (d) market value of equity after the stock split = reduced to $5 from $10 per share.

(iii) If the company declares a 1-for-2 reverse stock split, the share volume reduced to 50 shares from 100 shares and par value per share increases to $2 from, say $1. Then the

(a) share price= get double in par value to $2,say $1 previously, market share

per share doubles $20 from $10.

(b) number of shares outstanding= 50 shares,

(c) book value of equity= remains same in total and $16 per share of total volume of 50 shares, and

(d) market value of equity after the reverse stock split = gets double as the share volume reduced to half at $20 per share from $10 per share.

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