Question

The market price of a share of Omega 3 Company common shares is $110. If Omega 3 Company declares and issues a 30% stock dividend, the market price will, in theory, adjust to approximately:

a) $33
b) $143
c) $85
d) $70

Answer 1

After issuing a 30% stock dividend, the market price of Omega 3 Company common shares will theoretically adjust to approximately $85. This is calculated by dividing the original price by 1 plus the dividend rate.

Step-by-step explanation:

When Omega 3 Company declares and issues a 30% stock dividend, the market price of a share will adjust since shareholders will now own more shares, but the total value of the company remains the same. So, if the market price is $110 before the dividend, after the dividend, each share will represent a smaller percentage of the company. Therefore, the new price can be found by dividing the old price by 1 plus the dividend rate (1 + 0.30 in this case).

The calculation is as follows:
New Price = Old Price / (1 + Dividend Rate)
New Price = $110 / (1 + 0.30)
New Price = $110 / 1.30
New Price = $84.615 (approximately $85)

This means the correct answer is c) $85, as this is how the market theoretically adjusts the price per share to account for the increased number of shares after the stock dividend.