Companies sometimes consider stock splits to bring down the price so that the st
ID: 2793604 • Letter: C
Question
Companies sometimes consider stock splits to bring down the price so that the stock attracts more purchases Consider the following case Mainway Toy Company currently has 20,000 shares of common stock outstanding. Its management believes that its current stock price of $90 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. ertificate of st 12 1 If Mainway Toy Company declares a 2-for-1 stock split, 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, will be Hackworth Hardware Company is one of Mainway's leading competitors. Hackworth's market intelligence research team shares Mainway's plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Hackworth decide to offer stock dividends to its shareholders. If the firm pays a 5% stock dividend, what will be the total number of shares outstanding after the stock dividend? 3,696,000 shares O 3,528,000 shares O 4,200,000 shares O 3,360,000 shares Hackworth currently has 3,200,000 shares of common stock outstanding.Explanation / Answer
a.
Current number of share outstanding = 20,000
Current stock price = $90
Company plan to 2 for one stock split,it means for each stock shareholder will receive 2 stock and stock price of comapny become half of current price. So after Split number of share outstanding become 40,000 and share price become $45.
b.
Number of share wiith HHC = 3,200,000
company plans for 5% stock dividend,so after stock dividend number of share outstanding increase by 5% and share price reduce at same rate that total market value of company remains constant.
Number of share after Split = 3,200,000 × (1 + 5%)
= 3,360,000
Number of share after stock dividend will be 3,360,000.
Option (D) is correct answer.
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