Suppose that you own 2,400 shares of Nocash Corp. and the company is about to pa

Question

Suppose that you own 2,400 shares of Nocash Corp. and the company is about to pay a 25% stock dividend. The stock currently sells at $115 per share.

What will be the number of shares that you hold after the stock dividend is paid? (Do not round intermediate calculations.)

What will be the total value of your equity position after the stock dividend is paid? (Do not round intermediate calculations.)

What will be the number of shares that you hold if the firm splits five for four instead of paying the stock dividend?

What will be the number of shares that you hold after the stock dividend is paid? (Do not round intermediate calculations.)

Explanation / Answer

Shares held currently = 2400

Stock Dividend = 25%

Share Price = $115

Stock dividend is additional shares given based on the your existing shareholding in the company. For example a 25% stock dividend means that you get 25 new shares for 100 shares held in the company or 1 new share per 4 shares held.

a) New Shares = 25% of 2400 = 0.25 * 2400 = 600

No of shares that you hold after the dividend is paid = Currently held shares + New Shares

                                                                                      = 2400 + 600 = 3000

b) When a stock dividend is paid, there is no cash involved and the company is same as before (that is, the market value of the company remains same). Each shareholder is given a percentage of the new shares based on his/her existing shareholding. Thus, number of shares increases and the value of each share reduces after the stock dividend is paid. Hence, the total value of your equity position does not remain same.

Thus, total value of equity position after the stock dividend is paid = 2400 * 115 = $276,000

c) A five of four split means that for every four shares held in the company befor the split, you will have five shares after the split. In this also, the number of shares increases, but the value of the firm remains same.

4 shares before split = 5 shares after split

1 share before split = 5/4 shares after split

2400 shares before split = 2400 * 5/4 shares after split = 3000 shares after split

Thus, number of shares that you hold if the firm splits five for four = 3000

This, is essentially the same as paying a 25% stock dividend in the above cases wherein you get 1 new share per 4 shares held, thus giving you 5 shares in the company.

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