Companies sometimes employ stock splits to bring down the pr

Companies sometimes employ stock splits to bring down the price of its shares so that the stock is more attractive to potential investors.

Consider the case of Tasty Tuna Corporation:

Tasty Tuna Corporation currently has 15,000 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 a 4-for-1 stock split.

If Tasty Tuna Corporation declares a 4-for-1 stock split, what will be the price of the company’s stock after the split—assuming that the total value of the firm’s stock remains the same before and after the split—should be ($26.25, $35, $210, $420)   per share.

Savory Seafood Inc. is one of Tasty Tuna’s leading competitors. Savory Seafood’s market intelligence research team has learned of Tasty Tuna’s stock split plans, and is considering paying a stock dividend in response. As a result, executives at Savory Seafood decide to pay stock dividends to its shareholders. A stock dividend is another way of keeping the stock price from going too high. Savory Seafood Inc. currently has 1,650,000 shares of common stock outstanding.

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

49,500 shares

39,600 shares

44,550 shares

34,650 shares

Solution

Price of the share = 105/4 = 26.25

number of new shares issued to existing share holders = 0.03 * 1,650,000 = 49,500