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

Before the stock dividend, the total market value of the stock is $15 * 200,000 = $3,000,000. 
After the stock dividend, the number of shares outstanding will increase by 20%, or 40,000 shares. 
The new number of shares outstanding will be 240,000. 
The total market value of the stock remains $3,000,000, so the new price per share is $3,000,000 / 240,000 = $12.50.