Question

Companies sometimes consider stock splits to bring down the price so that the stock attracts more purchases.

Consider the following case:

Tolbotics Inc. currently has 20,000 shares of common stock outstanding. Its management believes that its current stock price of $105 per share is too high. The company is planning to conduct stock splits in the ratio of 3 for 1 as described in the animation.

If Tolbotics Inc. declares a 3-for-1 stock split, the price of the company’s stock after the split, assuming that the total value of the firm’s stock remains the same after the split, will be .

Hackworth Hardware Company is one of Tolbotics’s leading competitors. Hackworth Hardware Company’s market intelligence research team shares Tolbotics’s plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Hackworth decide to offer stock dividends to its shareholders.

A stock dividend is another way of keeping the stock price from going too high. Hackworth currently has 3,200,000 shares of common stock outstanding.

If the firm pays a 3% stock dividend, how many shares will the firm issue to its existing shareholders?

91,200 shares

72,000 shares

96,000 shares

100,800 shares

Answer 1

If Tolbotics Inc. declares a 3-for-1 stock split, the price of the company’s stock after the split would be $35 per share. Hackworth Hardware Company would issue 96,000 shares to its existing shareholders if it pays a 3% stock dividend.

Step-by-step explanation:

When a company declares a stock split, it aims to bring down the stock price to attract more purchases. In the case of Tolbotics Inc., which currently has 20,000 shares of common stock outstanding, the company is planning to conduct a 3-for-1 stock split. This means that for every 1 share, shareholders will receive 3 additional shares. Since the total value of the firm's stock remains the same after the split, the price of the company's stock after the split would be $35 per share ($105 divided by 3).

On the other hand, a stock dividend is another way of keeping the stock price from going too high. In the case of Hackworth Hardware Company, which currently has 3,200,000 shares of common stock outstanding, if the firm pays a 3% stock dividend, it would issue 96,000 shares to its existing shareholders to maintain the stock price.