8. Stock dividends and stock splits Companies sometimes consider stock splits to

Question

8. Stock dividends and stock splits 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 15,000 shares of common stock outstanding. Its management believes that its current stock price of $105 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 orst $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

Explanation / Answer

After the 2-for-1 stock split, the stock price will be halfed as the no. of shares are doubled leading to the same total value of the firm. Stock Price = 105 / 2 = $52.5

After 5% stock dividend, outstanding shares = 1,100,000 x (1 + 5%) = 1,155,000 shares

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