US Parcel Inc has 9000 shares of stock outstanding and a current stock price of

Question

US Parcel Inc has 9000 shares of stock outstanding and a current stock price of $25.00 per share. The company has no debt. The company is currently short on cash and announces that instead of a cash dividend they will pay the following stock dividend: one new share of stock for each 10 shares held (that is a 10% stock dividend). What will the new price per share if US Parcel be after the stock dividend goes into effect?

A.$22.73

B.$24.56

C.$25.32

D.$28.67

E.$29.43

PLEASE SHOW WORK IN DETAILED STEPS, AND I WOULD APPRECIATE IT.

Explanation / Answer

Stock price = $ 25 each Total No of shares = 9000 shares Stock dividend declared = 10% ie 10% on 9000 shares = 900 shares Total no of shares after stock dividend is declared = 9000+900 = 9900 shres After the stock dividend is declared, net worth of the company remains the same. Only the no of shares increases thereby decreasing the value of each share. That means, the share price of $ 25 each would decrease to the extent of no of shares increased. So the adjusted price after stock dividend is                       = 25/9900 * 9000                       = 22.72727 ie $ 22.73 In other words, total share capital for 9000 shares @ 25 each = $ 225,000. Now, the same value of $ 225,000 is the value of 9900 shares. So the value per share is $ 22.73 Answer : Option A $ 22.73.

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