Question

The Strasburg Company’s stock currently trades at $90 per share. Below is their partial balance sheet: Common Stock (1,500,000 shares outstanding) 30,000,000 Retained Earnings 15,000,000 Total 45,000,000

a) The company is considering a 3 for 2 stock split. What will be the company’s stock price following the stock split? How many shares will be outstanding? Show any changes to the Balance sheet.

b) If instead, the company does a 7% stock dividend. What will be the company’s stock price following the stock dividend? How many shares will be outstanding? Show any changes to the Balance sheet.

Answer 1

A) 3 for 2 stock split mean for every 2 shares, the investor would recieve 1 addtional stock. Price post stock price: 90/1.5=60. (1.5=3/2). No. of outstanding shares= 1,500,000*1.5= 2,250,000. The common stock par value =30mn/1.5mn = $ 20. The par value will decrease by 20/1.5=13.33. New common stock value = 13.33*2,250,000= 30Mn. Hence no change in Balance sheet

B). 7% stock dividend = 1.5mn*.07= 105,000 addtional shares. Stock price would decrease by 7% = 6.3. New price would be 83.7.

Total shares= 1,500,000+105,000=1,605,000

Burden to the company = addtional shars * New price= 8,788,500.

This would reduced the retained earning and bring it to 15,000,000-8,788,500= 6,211,500

Part of it would be charged to common stock= 20*105,000=2,100,000
other part would be charged to paid in capital excess of par =4,111,500.

Hence no change in balance sheet. Market cap would increase to offset the decrease in Retained earning

Market value of the common stock would also increase by 8,788,500(105,000 * 83.7),