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    Stock Dividend, stock split and Return on Equity

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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 outstanding and on the stock price of the following:

    15% Stock Dividend

    4-for-3 Stock Split

    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

    See the attached file. Thanks

    Total capitalization of the Menomonie Publishing stock = 1,200,000*$40=$48 million

    1. 15% stock dividend
    The number of shares outstanding will increase by 15% to =1,200,000*1.15=1,380,000
    Since the total market value of the firm will not change, the stock price after the ...

    Solution Summary

    Explains what will happen to the capitalization of the firm after the announcements by the firm for stock dividend or stock split. In the second part, it explains how the ROE of the two companies can be different given same net income and assets. These small problems check the conceptual foundation and are good from learning point of view.