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Stock Dividend , Stock Split, Reverse Stock Split and ROE for Menomonie Publishing

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1) 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

2) 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

Value of the company does not change because of stock dividends, stock splits and reverse stock splits

Number of shares= 1,200,000
Stock price= \$40 per share
Therefore value of the company= \$48,000,000 =1,200,000 x \$40.

a) 15% Stock Dividend
15% stock dividend
No of additional shares issued= 180,000 =15% x 1,200,000.
Original number of shares= 1,200,000
Total number of shares outstanding= 1,380,000

Stock price= \$34.78 =\$48,000,000 / 1,380,000.

Value of the ...

Solution Summary

The solution calculates the effect on stock price of stock dividend, stock split and reverse stock split and explains the reason for differences in return on equity between the two companies.

\$2.49