Corporate Investment Analysis: Menomonie Publishing, Hudson Homes, Baldwin Construction
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Menomonie Publishing Stock currently sells for $40 per share. The company has 1,200,000 shares outstanding. What would be the effect on the number of shares and on the stock price of the following :
1) 15% Stock Dividend
2) 4-for-3 Stock Split
3) Reverse 3-for-1 Stock Split.
Last year both Hudson Homes and Baldwin Construction earned $ 1 million in net income . Both companies have assets of $10 million. Hudson generated a return on equity of 11,1% whereas Baldwin produced a return on equity of 20%. What can explain the differences in return on equity between the two.
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Solution Summary
The solution carefully explains all the calculations used to arrive at correct answers to the questions about stock dividends, stock splits and return on equity.
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1) The stock dividend won't have any effect on the number of shares. The stock value, however, will decrease, exactly by the value of the dividend paid. Therefore, since the stock is trading at $40, the dividend will be 0.15*40 = $6, so the value of the stock right after the dividend is paid will go to $34.
2) In the case of a split, the number of shares will increase by a fraction of 4/3, and the price of the stock will decrease to 3/4 ...
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