21. You purchased 200 shares of H20 Corporation stock at a price of $20. Conside

Question

21. You purchased 200 shares of H20 Corporation stock at a price of $20. Consider each of the following announcements separately. What will the price of the stock be after each change? How many shares will you own? What will be the total value of your holdings (value of stock plus any income)? The firm announces a 10 percent stock dividend. The firm announces a two-for-one stock split. The firm announces a $0.50 per sha answer use the price of the stock on the ex-dividend date). The firm announces it will repurchase 10 percent of its shares; you do not offer to sell any of your shares. a. b. c. re dividend (in your d.

Explanation / Answer

a). No. of Shares = 200*1.1 = 220 shares

Price of stock = $4000/220 = $18.18

Total Value of Holdings = $18.18*220 = $4,000

b). No. of Shares = 200*2 = 400 shares

Price of stock = $4000/400 = $10

Total Value of Holdings = $10*400 = $4,000

c).  Your current wealth in the stock of the company is 200 shares x $20 = $4,000.

You will receive income (dividends) of $0.50 x 200 shares = $100.

The value of the stock will fall by $0.50 on the ex-dividend date from $20 to $19.50 per share. This occurs as the firm has distributed assets totaling $0.50/share to its shareholders. After the dividend the number of shares you own remains at 200 shares but the market price of the stock will be $19.50 so the value of your stock investment is 200 shares x $19.50/share = $3,900. Adding the $100 dividends received to this amount, the value of your holdings (stock plus dividends) is $4,000. In the case of dividends no new wealth is created, it is only transferred. The value of holdings (stock + cash) before the dividend will equal the value of the holdings after the dividend (ignoring taxes).

d). Your current wealth in the stock of the company is 200 shares x $20 = $4,000.

A 10% reduction in the number of shares outstanding will, all else equal, increase the stock’s price by about 10% to approximately $22/share.

As kept your holdings, their value is approximately 200 shares x $22/share = $4,400, an increase in value of 10%.

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