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Social Science Clinic => Business => Finance => Topic started by: D2AR0N on May 1, 2019

Title: Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 ...
Post by: D2AR0N on May 1, 2019

Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 earnings available for common stockholders. The board of directors has just voted a 5:2 stock split.

a.	If you had 100 shares of stock before the split, how many shares will you have after the split?

b.	What was the total value of your investment in Dryden stock before the split?

c.	What should be the total value of your investment in Dryden stock after the split?

d.	In view of your answers to (b) and (c) above, why would a firm's management want to have a

stock split?

Title: Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 ...
Post by: AmberC1996 on May 1, 2019

a.	Number of shares after split = 5/2 × 100 = 250

b.	Earnings per share before split = = $1.80

Price per share before split = 11 × $1.80 = $19.80
Total value of investment = $19.80 × 100 = $1,980

c.	Total number of shares after split =  = 1,250,000

Earnings per share after split = = $.72
Price per share after split = 11 × $.72 = $7.92
Total value of investment after split = $7.92 × 250 = $1,980

d.	(1) Stock splits are believed to have favorable information content. Splits are often associated

with growth companies. (2) Splits can conserve corporate cash if the firm has cash flow problems or needs additional funds for attractive investment opportunities.

Title: Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 ...
Post by: D2AR0N on May 1, 2019

TY

Title: Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 ...
Post by: AmberC1996 on May 1, 2019

You're welcome