Question

4. The stock of United Boot is priced at 5400 and offers a dividend yield of 2 percent. The company has a 2-for-1 stock split.

(a) Other things equal, what would you expect to happen to the stock price?

(b) In practice would you expect the stock price to fall by more or less than

this amount?

(c) Suppose that a few months later United Boot announces a rise in dividends

that is exactly in line with that of other companies. Would you expect the

announcement to lead to a slight abnormal rise in the stock price, a slight

abnormal fall, or no change?

Answer 1

A) in case of a stock split, the price of the share will be splitting into to smaller units and they will be falling down whereas the overall market capitalisation tends to go up because of large number of investors buying into the smaller shares.

B) I would expect in a reality that the price of the share will be going up because small investors will be able to invest into this company after it has been split into smaller units and it would lead to an increase in the overall market capitalisation because of inclusion of the new investor due to splitting of the share.

C) when there would be rise in the dividend and it will mean that the price of this share will be going up as it will mean that the company is trying to protect the interest of its investors and it is offering the high rate of return and it will also mean that the company is making higher profits and it is distributed in the market and it will be leading to a surge in the prices of the shares of the company.