Stock dividends, stock splits and reverse stock split
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Problem: 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 f.
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 Summary
The solution explains the differences between stock dividends, stock splits and reverse stock splits as they apply to the problem. There is also a calculation of return on equity (ROE).
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15% stock dividend will raise the amount of shares outstanding by 15% to 1,380,000 because every shareholder will receive a fractional share of .15 for each share owned. The dollar amount of the capital stock account will not change, but the market price of the stock will theoretically adjust downward by 15% simply because there are more shares to divide up less net assets. The price should adjust to $35~. ($40 / 1.15 = $34.78)
4:3 stock split will increase the shares outstanding by 33% to 1,600,000 ...
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