Question

Suppose the stock of Jagdambay Exports Corporation is currently trading at $20 per share.

a)         If company issued a 20% stock dividend, what will its new price be?

b)        If company does a 3:2 stock split, what will its new share price be?

c)         If company does a 1:3 reverse split, what will its new share price be?

Answer 1

For this question, it is best solvable by assuming that there are 100 shares outstanding.

a) If company issued a 20% stock dividend

Number of new shares outstanding = 100 * (1 + 20%) = 120

Now, on any of such stock event, market capitalization of company remains same, where market cap = Number of shares outstanding * Price per share.

Number of shares outstandind before dividend * Price per share before dividend = Number of shares outstandind after dividend * Price per share after dividend  

=> 100 * 20 = 120 * Price per share after dividend  

=> 16.67 = Price per share after dividend (Answer a)

b) If company does a 3:2 stock split, for every 2 shares outstanding, it will now have 3 shares.

So, for 100 shares, it will now have 100 * 3/2 = 150 shares.

Number of shares outstandind before dividend * Price per share before dividend = Number of shares outstandind after dividend * Price per share after dividend  

100 * 20 = 150 * Price per share after dividend

Price per share after dividend = $13.33 (Answer b)

c) If company does a 1:3 reverse stock split, for every 3 shares outstanding, it will now have 1 share.

So, for 100 shares, it will now have 100 * 1/3 = 33.33 shares.

Number of shares outstandind before dividend * Price per share before dividend = Number of shares outstandind after dividend * Price per share after dividend  

100 * 20 = 33.33 * Price per share after dividend

Price per share after dividend = $60 (Answer c)