Tara S. Clark

1.  Stock split versus stock dividend-Firm Mammoth Corporation is considering a 3-2 stock split. It currently has a stockholder’s equity position shown. The current stock price is $120 per share. The most recent periods earnings available for common stock is included in retained earnings.

Preferred stock 1,000,000

Common stock

(80,000 share at $5 par) 400,000

Paid in capital in excess of par 1,700,000

Retained earnings 10,000,000

Total stockholders’ equity 13,100,000

A.  What effects on Mammoth’s equity account would result from a stock split?

B.  What change in stock price would you expect to result from the stock split?

C.  What is the maximum cash dividend per share the firm could pay on common stock before and after the split? (assume the legal capital included all paid in capital)

D.  Contrast your answer to parts a through c with circumstances surrounding a 50% stock dividend. What effects on Mammoth would result from the stock dividend?

E.  Explain the differences between stock splits and stock dividends.

2.  Security Data Company has outstanding 30,000 shares of common stock currently selling at $36 per share. The firm most recently had earnings available for common stockholders of 115,000 but it has decided to retain these funds and is considering a 20% stock dividend in lieu of a cash dividend.

a.  Determine the firm’s current earnings per share.

b.  If Sam currently owns 700 shares of the firm’s stock, determine his proportion of ownership currently and under the proposed 20% stock dividend.

c.  Calculate the market price per share under the 20% stock dividend plan.

d.  For the proposed 20% stock dividend plan, calculate the EPS after payment of the stock dividend.

e.  What is the value of Sam’s holding under the 20% stock dividend plan?

f.  Should Sam have any preference with respect to the proposed stock dividend?

3.  Preferred stock 400,000

Common Stock (800,000 shares at $2par) 1,600,000

Pd-in capital in excess of par 200,000

Retained earnings 800,000

Total stockholders’ equity 3,000,000

Indicate the change in par value and the number of share outstanding if the firm declares a:

2-1 stock split

1-1  ½ reverse split

3-1 split

6-1 split

1-4 reverse stock split