Question 1

A stock split has ________.

Accepted Answer

A stock split does not change the total value of a company or its capital structure. It only divides the existing shares into smaller ones, therefore, it has no effect on a company's equity or debt structure.

Question 2

A stock split is usually taxable to a firm as it restructures the capital.

Accepted Answer

A stock split does not result in any taxable event for either the firm or the shareholders. It only increases the number of shares and decreases the price per share, without changing the value of the firm or the shareholders' stake in it.

Question 3

Tangshan Mining Company has released the following information.  (a) What are Tangshan Mining's current earnings per share?
(b) What is Tangshan Mining's current P/E ratio?
(c) Tangshan Mining wants to use half of its earnings either to pay shareholders dividends or to repurchase shares for inclusion in the firm's employee stock ownership plan. If the firm pays a cash dividend, what will be the dividend per share received by existing shareholders?
(d) Instead of paying the cash dividend, what if the firm uses half of its earnings to pay $55 per share to repurchase the shares, what will be the firm's new EPS? What should be the firm's new share price?
(e) Compare the impact of a stock dividend and stock repurchase on shareholder wealth.

Accepted Answer

The answer of Tangshan Mining Company has released the following...

Question 4

Hayley's Optical has a stockholders' equity account as shown below. The firm's common stock currently sells for $20 per share.  (a) What is the maximum dividend per share Hayley's Optical can pay? (Assume capital includes all paid-in capital.)
(b) Recast the partial balance sheet (the stockholders' equity accounts) to show independently
(1) a 2-for-1 stock split of the common stock.
(2) a cash dividend of $1.50 per share.
(3) a stock dividend of 5% on the common stock.
(c) At what price would you expect Hayley's Optical stock to sell after
(1) the stock split?
(2) the stock dividend?

Accepted Answer

The answer of Hayley's Optical has a stockholders' equity account...

Question 5

Tangshan Mining has 100,000 shares outstanding and just declared a 3-for-2 stock split. Before the announcement, the firm's shares were trading at $50.00 per share. After the stock split, the firm's shares should trade at ________ per share.

Accepted Answer

In a 3-for-2 stock split, for every 2 shares an investor owns, they receive 3 shares. This increases the number of shares but reduces the price per share so that the total value remains the same. If the shares were trading at $50 before the split, after the split, each share would trade at $50 * (2/3) = $33.33 to keep the overall market capitalization of the company constant.

Question 6

The purpose of a stock split is to ________.

Accepted Answer

The purpose of a stock split is to enhance the trading activity of the stock by lowering the market price. This makes the stock more affordable and attractive to investors, which could increase demand and trading volume. A stock split does not change a firm's capital structure, decrease the dividend, or increase the market price of the stock.

Question 7

The purpose of a reverse stock split is to ________.

Accepted Answer

A reverse stock split reduces the number of outstanding shares, which increases the price of each share. This is typically done in an effort to boost the company's stock price and make the stock more appealing to potential investors. It does not involve issuing additional shares, increasing dividends, or decreasing trading activity.

Question 8

A ________ has an effect on a firm's share price similar to that of a ________.

Accepted Answer

Both a stock dividend and a stock split increase the number of shares outstanding, while reducing the price per share. This has a similar effect on the firm's market capitalization, and therefore the share price. A stock repurchase would typically have the opposite effect, as it reduces the number of shares outstanding, increasing the price per share. A cash dividend would not directly impact the number of shares outstanding, and therefore would not have a similar effect on the share price.

Question 9

The primary purpose of a stock split is to ________.

Accepted Answer

The primary purpose of a stock split is to reduce the price of a stock. This is done by increasing the number of outstanding shares while keeping the overall market capitalization the same. By reducing the price of a stock, the company may attract more investors who may have previously been unable to afford the higher price per share. This can increase demand for the stock and potentially lead to a rise in its value. Therefore, option C is correct. Options A and B are both incorrect as they do not accurately describe the primary purpose of a stock split. Option D is also incorrect as a stock split is more likely to increase trading activity rather than reduce it.

Question 10

Tangshan Mining has 100,000 shares outstanding and just declared a 2-for-1 stock split. Before the announcement, the firm's shares were trading at $50.00 per share. After the stock split, the firm's shares should trade at ________ per share.

Accepted Answer

A 2-for-1 stock split means that for every one share owned, the shareholder will receive two shares. Therefore, Tangshan Mining's total number of shares will double to 200,000 (100,000 x 2). Since the value of the company has not changed, the share price should decrease by half. Therefore, the new share price will be $25.00 (original share price of $50.00 divided by 2).

Quiz 14: Payout Policy