You own 500 shares of a firm that has 100 million shares outstanding. The market price per share is $50. If the firm declares a 20% stock dividend, how many shares will you own after
The dividend is paid, and what will the market price per share be?

Question

Quizplus · Accepted Answer

A 20% stock dividend means that the firm will give 20% more shares to its shareholders. So, you will receive 20% of your current holdings, which equals 100 shares (20% of 500 shares).
After the stock dividend is paid, you will own 600 shares (500 original shares + 100 stock dividend shares). 
To calculate the new market price per share, we need to consider the total value of the shares. The total value of the shares before the stock dividend is 500 shares x $50 per share = $25,000. After the stock dividend, the total value of the shares should remain the same (assuming no change in the underlying value of the company). So, $25,000 should be divided among the new number of shares, which is 600. Thus, the market price per share after the stock dividend will be $41.67 ($25,000 ÷ 600). After the stock dividend, you will receive 20% of 500 shares, which is 100 shares. Therefore, you will own a total of 600 shares. 
The total number of shares outstanding will increase to 120 million. 
To calculate the new market price per share, we use the formula:
New market price per share = (Current market price per share)/(1 + % stock dividend)
New market price per share = $50 / (1 + 20%) = $41.67
Therefore, you will own 600 shares at a price of $41.67 per share after the stock dividend is paid.

You Own 500 Shares of a Firm That Has 100