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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.

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    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 ...

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