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# Menomonie Publishing effect on number of shares: split, reverse split, stock dividend

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Menomonie Publishing stock currently sells for \$40 per share. The company has 1,200,00 shares outstanding. What would be the effect on the number of shares outstanding 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 20.0%. What can explain the differences in return on equity between the two companies.

#### Solution Preview

1. Menomonie Publishing has a total valuation of \$48 million (1.2
million shares x \$40/per share), so increases in the number of shares
should see a decrease in the stock price - while lowering the number
of outstanding shares should increase the per-share price:

A 15% stock dividend will increase the number of shares to 1,380,000
and lower the price to \$34.78 = \$48,000,000 / 1,380,000

Thus, if you increase the number of shares by 15%, you lower the stock
price by 1/1.15 or about 13%.

2. A 4-for-3 stock split is a 33.3% increase to 1,600,000 shares so
the stock price should be \$48,000,000 / 1,600,000 shares = \$30 per
share. A 33.3% increase in shares would reduce the stock price ...

#### Solution Summary

In a 480 word solution, the reponse discloses the formulas used to calculate the answers to the questions.

\$2.19