Question

Assume that you own 70 shares of common stock of a company, that you have been receiving cash dividends of $3 per share per year, and that the company has a 3-for-2 stock split.Required:How many shares of common stock will you own after the stock split?What new cash dividend per share amount will result in the same total dividend income as you received before the stock split? (Do not round intermediate calculations. Round your answer to 2 decimal places.)What stock dividend percentage could have accomplished the same end result as the 3-for-2 stock split?

Answer 1

Answer:

a. 105.

b. $2.

c. 30%.

Explanation:

a. How many shares of common stock will you own after the stock split?

Stock split is a policy applied by the board of directors of a company that consists in increasing the number of outstanding shares by delivering more shares to current shareholders. To find the new amount of shares, we simply multiply the original number of shares by the magnitude of the split, in this case 3/2:

$Shares=70*\frac{3}{2}$

$Shares=105$

b. What new cash dividend per share amount will result in the same total dividend income as you received before the stock split?

The first thing we should do is find the dividend income before the stock split:

$Dividend Income=Shares*Dividends$

$DividendIncome=70*3$

Dividend Income = 210

Now, this income is divided by the new amount of shares, in order to find the new cash dividend per share:

(NCD = New Cash Dividend)

$NCD=\frac{210}{105}$

$NCD=2$

Therefore, the dividend that should be paid per share to maintain the same total dividend income is $2.

c. What stock dividend percentage could have accomplished the same end result as the 3-for-2 stock split?

To find this value, we must follow this formula:

$SD=\frac{-ND+OD}{ND}$

Where:

SD= Stock Dividend (Percentage).

ND= New Dividend.

OD= Original Dividend.

We replace the values:

$SD=\frac{-2+3}{3}$

$SD=\frac{1}{3}$

$SD=0.3$

Therefore, the stock dividend percentage is 30%.