Question 1

Stark Industries currently trades for $50 per share and has 175M shares outstanding.It announces that it will execute a reverse-split on a 1-for-3 basis.How many shares will be outstanding after the split?

Accepted Answer

The Split ratio is:
S = 11ea7fdb_fc56_70cb_a768_7be66ee9b043_TB2902_11 S = 11ea7fdb_fc56_70cc_a768_a160d1de2a70_TB2902_11 = 0.33
Shares outstanding after the split is:
Shares outstanding after the split = S × Shares outstanding before the split
Shares outstanding after the split = 0.3333 × 175M
Shares outstanding after the split = 58.333M

Question 2

On January 1,Year 1 you bought 100 shares of Oscorp Inc.It is now January 1 of Year 2.You have recorded stock price information for Oscorp in the table,below.You want to calculate your return on the investment.After digging through your records you realize that Oscorp executed a 3-for-2 stock split late in Year 1.Use this information to adjust the data in the table and calculate the split-adjusted annual return on the investment in Cyberdyne shares.
Selected Financial Data
Oscorp Inc.

Accepted Answer

The price after a split is given by: P_A = 11ea7fdb_fc57_342f_a768_578da85eb3de_TB2902_11 Where P_B = the price before S = the split ratio In this example, S = 1.5 (a 3-for-2 split), so we can adjust the stock price in Year 2 to see what they would have been had the split not happened. P₂ = $8 × 1.5 = $12 The split-adjusted return is: k₁ = 11ea7fdb_fc57_5b40_a768_559241405ea7_TB2902_11 = 0

Question 3

On January 1,Year 1 you bought 100 shares of Universal Exports Inc.It is now January 1 of Year 2.You have recorded stock price and dividend information for Universal in the table,below.You want to calculate your return on the investment.After digging through your records you realize that Universal executed a 3-for-1 stock split late in Year 1.Use this information to adjust the data in the table and calculate the split-adjusted annual return on the investment in Universal shares.
Selected Financial Data
Universal Exports Inc.

Accepted Answer

The price after a split is given by: P_A = 11ea7fdb_fc57_a965_a768_ad04c344b926_TB2902_11 Where P_B = the price before S = the split ratio In this example, S = 3 (a 3-for-1 split), so we can adjust the stock price in Year 2 to see what it would have been had the split not happened. P₂ = $8 × 3 = $24 The dividends were also affected by the split. They were cut by two thirds. Thus, without the split the dividend would have been: D₂ = $0.40 × 3 = $1.20 The split-adjusted return with dividends is: k₁ = 11ea7fdb_fc57_a966_a768_bdcd434e6d14_TB2902_11 = 1.10

Question 4

Central Perk Coffee Co.trades for $0.85 per share and had 100M shares outstanding.It announces that it will execute a reverse-split on a 1-for-4 basis.What price will the stock trade for after the split?

Accepted Answer

The Split ratio is: S = 11ea7fdb_fc56_49b7_a768_c7b23c981bcc_TB2902_11 S = 11ea7fdb_fc56_49b8_a768_430c63387004_TB2902_11 = 0.25 The stock price after the split is: P_A = 11ea7fdb_fc56_49b9_a768_9dec3adfbf24_TB2902_11 P_A = 11ea7fdb_fc56_49ba_a768_79e1c8c27306_TB2902_11 P_A = $3.40 Therefore, the stock price will be $3.40 after the reverse-split.

Question 5

Ewing Oil has $5B of excess cash and has announced an open market stock repurchase.Prior to the announcement,the stock was trading for $25 per share and there are 2.5B shares outstanding.Assume that the stock repurchase is executed at the pre-repurchase price.Sue Ellen has 100 shares of Ewing Oil.She bought the shares for $25 per share.Sue Ellen pays a tax rate of 20% on capital gains and 34% on dividends.What is Sue Ellen's after-tax wealth if she sells the same proportion of shares as Ewing repurchases,and that she receives the same price that Ewing pays? Assume that Sue Ellen sells her remaining shares after the repurchase at the price that prevails after the repurchase.

Accepted Answer

The number of shares that Ewing Oil will repurchase is: N_R = 11ea7fdb_fc55_ad6f_a768_f78eb04858f9_TB2902_11 N_R = 0.2B f = 11ea7fdb_fc55_d480_a768_bb6a942d3e2c_TB2902_11 f = 11ea7fdb_fc55_d481_a768_617ba0c449a2_TB2902_11 f = 0.08 or 8% Sue Ellen will sell 8% of her shares. An open market repurchase executed at the pre-repurchase will leave the stock price at its pre-repurchase level. Thus, P_A = P_B = $25. After the repurchase, Sarah's remaining shares will be worth: Value of Shares = 100 × (1 - 0.08) × $25 - Tax on capital gain Since she sells them for the same price as she purchased them, there is no gain and no tax. After-tax value of remaining shares = $2,300 Sarah sells 10% of shares and the proceeds from the sale are: Sale proceeds before tax = 100 × 0.08 × $25 Sale proceeds before tax = $200 Sarah's tax on the repurchased shares is a capital gains tax: Capital gains tax = (Sale price - purchase price) × T_G Where T_G is her tax rate on capital gains. Since the she sold the shares for $25 and bought them for $25 there is no capital gain and thus no tax. After-tax repurchase income = Sale proceeds before tax - taxes After-tax repurchase income = $250 - $0 After-tax repurchase income = $250 Total wealth = shares + cash Total wealth = $2,300 + $200 Total wealth = $2,500

Question 6

Acme Explosives Inc.is an international producer of creative demolition products.Selected financial information for Acme is provided in the table below.Acme wants to distribute all of its cash with an open market repurchase.Assume that Acme is able to buy back 1,064,377,778 shares for an average price of $27 per share.What is Acme's stock price after the repurchase?
Selected Financial Information
For Acme Corporation

Accepted Answer

The company buys 1,064,377,778 shares, so the fraction repurchased is: f = 11ea7fdb_fc54_c2f7_a768_7f2ea795cddb_TB2902_11 = 11ea7fdb_fc54_c2f8_a768_27b31e6a3d19_TB2902_11 = 0.16815 The stock price after the repurchase is: P_A = P_B 11ea7fdb_fc54_c2f9_a768_8b26475045eb_TB2902_11 - P_R 11ea7fdb_fc54_c2fa_a768_ffd9586dfcb4_TB2902_11 P_B = $28.09 P_A = $28.09 × 11ea7fdb_fc54_c2fb_a768_63090ca21420_TB2902_11 - $27 × 11ea7fdb_fc54_c2fc_a768_15b47587b301_TB2902_11 P_A = $28.31

Question 7

The Cash Store Co.just repurchased 11.875 million shares at a price of $14.The stock was trading at a price of $16 prior to the repurchase,but a market correction gave the company an opportunity to repurchase at a lower price.There were 100 million shares outstanding prior to the repurchase.The stock is now trading for $16.27.What is the aggregate gain in value to all the shares that remain outstanding as a result of the repurchase? (Compare their value before the repurchase to their value after.)

Accepted Answer

After the repurchase the number of shares outstanding is: N_A = 100 - 11.875 = 88.125 Each share rises in value from $16 to $16.27 for a total gain of: Gain = (16.27 - 16) × 88,125,000 = $23.79375 million Gain = $23.794 million

Question 8

Select financial data for Ewing Oil Inc.is provided in the table below.Ewing Oil repurchased $4.75B worth of shares during the year at an average price of $25.How many shares are outstanding at the end of the year?
Ewing Oil Inc.
Selected Financial Information

Accepted Answer

Shares Outstanding in Ewing before Repurchase = 1.86B
Number of shares repurchased = 11ea7fdb_fc55_5f49_a768_6b19e9f4f2ab_TB2902_11 Number of shares repurchased = 11ea7fdb_fc55_5f4a_a768_1f3a3fb4f72e_TB2902_11 = 0.19B
Shares Outstanding in Ewing after Repurchase = 1.86 - 0.19 = 1.67B

Question 9

Shares of Brockshire Holding Company Inc.trade for $90,000 per share.There are 1.75 million shares outstanding.If Brockshire wanted to execute a stock split so as to reduce the stock price to $80,what split ratio would they use?

Accepted Answer

P_A = 11ea7fdb_fc56_22a4_a768_d9218af851b4_TB2902_11 Rearranging the formula we get: S = 11ea7fdb_fc56_22a5_a768_630858a41388_TB2902_11 S = 11ea7fdb_fc56_22a6_a768_0148770984c2_TB2902_11 = 1,125 A 1,125-for-1 stock split would bring the Brockshire Holding Company price down to $80.

Question 10

B&O Railroad Inc.transports industrial products and supplies throughout the North Eastern United States.Selected financial information for B&O is provided in the table below.B&O is considering a stock dividend of 10%,whereby each shareholder of record will receive one additional share for each 10 shares that they own.What will shares outstanding be after the dividend?
B&O Railroad Inc.
Selected Financial Information

Accepted Answer

S = 11ea7fdb_fc56_97de_a768_5d04c574f7fd_TB2902_11 The split ratio, denoted S, for a 10% stock dividend is: S = 11ea7fdb_fc56_97df_a768_23af08cdfc65_TB2902_11 = 1.10 Shares outstanding after the dividend are: S_A = S × S_B S_A = 1.10 × 150M = 165M

Question 11

On January 1,Year 1 you bought 100 shares of Cyberdyne Systems Inc.It is now January 1 of Year 2.You have recorded stock price and dividend information for Cyberdyne in the table,below.You want to calculate your return on the investment.After digging through your records you realize that Cyberdyne executed a 2-for-1 stock split late in Year 1.Use this information to adjust the data in the table and calculate the split-adjusted annual return on the investment in Cyberdyne shares.
Selected Financial Data
Cyberdyne Systems Inc.

Accepted Answer

The price after a split is given by: P_A = 11ea7fdb_fc57_5b42_a768_2199f808a9cc_TB2902_11 Where P_B = the price before S = the split ratio In this example, S = 2 (a 2-for-1 split), so we can adjust the stock price in Year 2 and the dividend to see what they would have been had the split not happened. P₂ = $8 × 2 = $16 The dividends were also affected by the split. They were cut in half. Thus, without the split the dividend would have been: D₂ = $0.40 × 2 = $0.80 The split-adjusted return with dividends is: k₁ = 11ea7fdb_fc57_8253_a768_7ffbb5466068_TB2902_11 = 0.4 or 40%

Question 12

B&O Railroad Inc.transports industrial products and supplies throughout the North Eastern United States.Selected financial information for B&O is provided in the table below.B&O is considering a stock dividend of 5%.What will earnings-per-share be after the dividend?
B&O Railroad Inc.
Selected Financial Information

Accepted Answer

EPS_A = 11ea7fdb_fc56_e606_a768_73b33c9c3140_TB2902_11 S_A = S × S_B S = 11ea7fdb_fc57_0d17_a768_bf7df2df98a1_TB2902_11 S = 11ea7fdb_fc57_0d18_a768_db5d8089032e_TB2902_11 S = 1.05 EPS_A = 11ea7fdb_fc57_0d19_a768_ff956f45e43e_TB2902_11 EPS_A = 11ea7fdb_fc57_0d1a_a768_49984dd8b37d_TB2902_11 × 11ea7fdb_fc57_0d1b_a768_d38a519f76f6_TB2902_11 EPS_A = 11ea7fdb_fc57_0d1c_a768_9bb38b02c90a_TB2902_11 EPS_A = 11ea7fdb_fc57_342d_a768_2b03525f7bb3_TB2902_11 = $5.71

Question 13

Willys-Overland Motors Inc.produces 4×4 quarter-ton trucks.Selected financial information for Willys-Overland is provided in the table below.
The CEO,John Willys,wants to distribute $1B of cash using a stock repurchase.He intends to repurchase 15 million shares at a price of $70.Mr.Willys owns 22.5 million shares (worth $1,395 million before the repurchase).He does not plan to sell any of his shares during the repurchase.What is his wealth after the repurchase?
Willys-Overland Motors Inc.
Selected Financial Information

Accepted Answer

The fraction repurchased, f, is 11ea7fdb_fc55_3833_a768_8b69f212466b_TB2902_11 = 10% and the repurchase price is $70: The stock price after the repurchase is: P_A = P_B 11ea7fdb_fc55_3834_a768_a70d528e5053_TB2902_11 - P_R 11ea7fdb_fc55_3835_a768_8b9686b5d59f_TB2902_11 P_A = $62 × 11ea7fdb_fc55_3836_a768_93df8bb4780f_TB2902_11 - $70 × 11ea7fdb_fc55_3837_a768_952b3f7fecd9_TB2902_11 P_A = $61.11 After the repurchase, their shares are worth: Value of shares = 22.5M × $61.11 Value of shares = $1,375 million

Question 14

B&O Railroad Inc.transports industrial products and supplies throughout the North Eastern United States.Selected financial information for B&O is provided in the table below.B&O is considering a stock dividend of 7.5%.What will the stock price be after the dividend (Assuming no other changes)?
B&O Railroad Inc.
Selected Financial Information

Accepted Answer

S = 11ea7fdb_fc56_bef1_a768_bdb587c20e8d_TB2902_11 The split ratio, denoted S, for a 7.5% stock dividend is: S = 11ea7fdb_fc56_bef2_a768_75911545d2d3_TB2902_11 = 1.075 The stock price after the stock dividend is: P_A = 11ea7fdb_fc56_bef3_a768_01b866912331_TB2902_11 P_A = 11ea7fdb_fc56_bef4_a768_6f7f2a2ff877_TB2902_11 = $63.26

Question 15

Pearson Hardman Inc.currently has 2 million shares outstanding and earnings per share (EPS)of $6.After a 3-for-2 split,the shares outstanding and EPS will be:

Accepted Answer

A 3-for-2 split means that the split ratio is: S = 1.5. Shares outstanding after the split is: Shares outstanding after the split = S × Shares outstanding before the split Shares outstanding after the split = 1.5 × 2 million = 3 million. EPS_A = 11ea7fdb_fc55_fb92_a768_b7adb9215013_TB2902_11 EPS_A = 11ea7fdb_fc55_fb93_a768_fd0d07a444d1_TB2902_11 = $4

Question 16

Kaiser Shipyards Inc.is San Francisco-based ship builder which specializes in Liberty and Victory class cargo ships.The CEO,Henry Kaiser,wants to distribute $1B of cash using an open market stock repurchase.Assume that the company repurchases 11.650% of shares outstanding at a price of $62.725.What is the stock price after the repurchase?
Kaiser Shipyards Inc.
Selected Financial Information

Accepted Answer

The fraction repurchased, f, is 11.650% and the repurchase price is $62.725: The stock price after the repurchase is: P_A = P_B 11ea7fdb_fc54_ea0e_a768_85fffd560706_TB2902_11 - P_R 11ea7fdb_fc54_ea0f_a768_67b165ba2fa3_TB2902_11 P_A = $62.725 × 11ea7fdb_fc55_1120_a768_c3cb4adbd723_TB2902_11 - $62.725 × 11ea7fdb_fc55_1121_a768_55dadae7f954_TB2902_11 P_A = $62.725

Question 17

Santa Fe Railway transports industrial products and supplies throughout the Western United States.Selected financial information for Santa Fe is provided in the table below.The CFO of Santa Fe,Richard Pennybags,wants to distribute $1B of cash using an open market stock repurchase.If the shares are bought back at the pre-repurchase price,then what proportion of shares will be repurchased?
Santa Fe Railway
Selected Financial Information

Accepted Answer

N_R = 11ea7fdb_fc55_865c_a768_93ba1f9e72bf_TB2902_11 N_R = 15.9426M f = 11ea7fdb_fc55_ad6d_a768_3ba2332a1794_TB2902_11 f = 11ea7fdb_fc55_ad6e_a768_4daa1beb6a20_TB2902_11 f = 0.10628 or 10.628%

Quiz 13: Dividends, repurchases, and Splits

Stark Industries currently trades for $50 per share and has 175M shares outstanding.It announces that it will execute a reverse-split on a 1-for-3 basis.How many shares will be outstanding after the split?

Central Perk Coffee Co.trades for $0.85 per share and had 100M shares outstanding.It announces that it will execute a reverse-split on a 1-for-4 basis.What price will the stock trade for after the split?

Select financial data for Ewing Oil Inc.is provided in the table below.Ewing Oil repurchased $4.75B worth of shares during the year at an average price of $25.How many shares are outstanding at the end of the year? Ewing Oil Inc. Selected Financial Information

Shares of Brockshire Holding Company Inc.trade for $90,000 per share.There are 1.75 million shares outstanding.If Brockshire wanted to execute a stock split so as to reduce the stock price to $80,what split ratio would they use?

Pearson Hardman Inc.currently has 2 million shares outstanding and earnings per share (EPS) of $6.After a 3-for-2 split,the shares outstanding and EPS will be: