Rocky Ground Camping Supply Inc. has 200,000 shares of stock outstanding each with a market value of $15. In addition, on the balance sheet there is common stock of $1,950,000 and retained earnings of $1,450,000. Suppose the firm declares a 20% stock dividend. What is the stock's new price per share? Assume there are no taxes or transaction costs.

Question

Quizplus · Accepted Answer

The new price per share after a 20% stock dividend is calculated by dividing the total market value of the stock before the dividend by the new total number of shares. The total market value before the dividend is 200,000 shares * $15/share = $3,000,000. A 20% stock dividend means the number of shares increases by 20%, so the new number of shares is 200,000 * 1.20 = 240,000 shares. The new price per share is $3,000,000 / 240,000 shares = $12.50.