When a company desires to increase the market value per share of common stock, the company will implement
Answer(s): B
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.
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
Answer(s): C
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.
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%?
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%.
Which of the following is correct for a firm with $100000 in net earnings, 10,000 shares, and a 30% payout ratio?
Answer(s): D
Earnings per share is &10 ($100,000 ÷ 10,000 shares). Of the $10,30% or $3 is paid out as dividend.
On August 15, 19XX, National Corporation announced a 1-for-10 reverse split, the event to occur on September 6, subject to shareholder approval. The stock's closing price on August 14 was $1.375. If nothing changes, at what price would you expect the stock to sell after the stock split is made effective on September 6?
Answer(s): A
A reverse stock split, like a regular stock split, should not change market capitalization. Thus, if there are 1/10 as many shares outstanding as previously, they should be worth 10 times as much. Thus, the price after the reverse split would be $13.75 (10 x $1375).
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