Companies sometimes consider stock splits to bring down the price so that the stock attracts more purchases. Consider the following case:

Tolbotics Inc. currently has 15,000 shares of common stock outstanding. Its management believes that its current stock price of $90 per share is too high. The company is planning to conduct stock splits in the ratio of 3 for 1 as described in the animation.

If Tolbotics Inc. declares a 3-for-1 stock split, the price of the company’s stock after the split, assuming that the total value of the firm’s stock remains the same after the split, will be .

Hackworth Hardware Company is one of Robotics leading competitors. Hackworth Hardware Company’s market intelligence research team shares Robotics plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Hackworth decide to offer stock dividends to its shareholders. A stock dividend is another way of keeping the stock price from going too high. Hackworth currently has 1,100,000 shares of common stock outstanding.

If the firm pays a 6% stock dividend, how many shares will the firm issue to its existing shareholders?

Stock Splits:

1. Tolbotics Inc. currently has 15,000 shares of common stock outstanding. Its management believes that its current stock price of $90 per share is too high. The company is planning to conduct stock splits in the ratio of 3 for 1 as described in the animation.

If Tolbotics Inc. declares a 3-for-1 stock split, the price of the company’s stock after the split, assuming that the total value of the firm’s stock remains the same after the split, will be$30 .

2. Hackworth Hardware Company is one of Robotics leading competitors. Hackworth Hardware Company’s market intelligence research team shares Robotics plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Hackworth decide to offer stock dividends to its shareholders. A stock dividend is another way of keeping the stock price from going too high. Hackworth currently has 1,100,000 shares of common stock outstanding.

If the firm pays a 6% stock dividend, how many shares will the firm issue to its existing shareholders?

= 66,000

Explanation:

The 3-for-1 stock split shares offered to stockholders by Tolbotics Inc. will result into a share price of $33 ($99/3).  This effectively reduces the stock exchange market price but does not affect its shareholders adversely since they still retain the same value of shareholding in the company.  Shareholders may even gain more in capital appreciation if the share price goes up after the split.

Hackworth Hardware Company is offering its shareholders a total of 66,000 additional shares (6% of 1,100,000) in the form of dividends.

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