QUESTION: 138 Topic 3: Part 2 Sec Three (101 to 203)

When a company desires to increase the market value per share of common stock, the company will implement

The sale of treasury stock.
A reverse stock split.
The sale of preferred stock.
A stock split.

Answer(s): B

Explanation:

A reverse stock split decreases the number of shares outstanding, thereby increasing the market price per share. A reverse stock split may be desirable when a stock is selling at such a low price that management is concerned that investors will avoid the stock because it has an undesirable image.

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QUESTION: 139 Topic 3: Part 2 Sec Three (101 to 203)

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Arch, Inc. has 200,000 shares of common stock outstanding. Net income for the recently ended fiscal year was $500,000, and the Stock has a price- earnings ratio of eight. The board of directors has just declared a three-for-two stock split. For an investor who owns 100 shares of stock before the split, the approximate value (rounded to the nearest dollar) of the investment in Arch stock immediately after the split is

$250
$1,333
$2,000
$3,000

Answer(s): C

Explanation:

EPS equals $250 ($500,000 NI ÷ 200,000 pre-split shares). Thus, 100 shares had a value of $2,000 (100 shares x $250 EPS x 8 P-E ratio) before the split. This value is unchanged by the stock split. Although the stockholder has more shares, the total value of the investment is the same.

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QUESTION: 140 Topic 3: Part 2 Sec Three (101 to 203)

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What return on equity do investors seem to expect for a firm with a $50 share price, an expected dividend of $5.50, of 9, and a constant growth rate of 4.5%?

15.05%
15.50%
15.95%
16.72%

Answer(s): B

Explanation:

Dividing the $5.50 dividend by the $50 share price produces an 11% dividend yield. Adding the 11% yield to the 4.5% growth rate produces a total return of 15.5%.

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