Question

A company that has been growing rapidly announces that it is splitting its stock 3:2 and increasing its cash dividend by 20%. Prior to the announcement, the stock was trading at $60 and the dividend yield was 10%. What will be the next dividend paid per share

Answer 1

Answer:

$4.8 per share annually

$1.20 per share quarterly

Explanation:

Stock Split is the issuance of additional share with proportion to the existing share holding. It increase the numbers of outstanding share of the company. Ir results in decrease in the market price of the share but the total market capitalization remains the same.

Dividend yield is the rate of dividend payment as per the market value of that share.

As per given data

Stock price = $60

Dividend yield = Dividend / Market Price

10% = Dividend / $60

Dividend = $60 x 10% = 46

On stock split, for every 2 shares, there will now be 3 shares. Shares are increase by 1.5 times (3/2).

After Stock Split

Share price = $60 / 1.5 = $40

Annual dividend amount per share before the increase

Dividend = $6.00 / 1.5 = $4.00 per share

Annual dividend amount per share before the increased by 20%

Dividend = $4 x 120% = $4.80 per share

Quarterly dividend payment = $4.80 / 4 = $1.20 per share