Question

Firm Mammoth Corporation is considering a​ 3-for-2 stock split. It currently has the​ stockholders' equity position shown. The current stock price is​ $120 per share. The most recent​ period's earnings available for common stock is included in retained earnings.

a. What effect on​ Mammoth's equity account would result from the stock

split​?

b. What change in stock price would you expect to result from the stock​ split?

c. What is the maximum cash dividend per share that the firm could pay on common stock before and after the stock​ split? ​ (Assume that legal capital includes all​ paid-in capital.)

d. Contrast your answers to parts a through c. with the circumstances surrounding a​ 50% stock

dividend.

e.  Explain the differences between stock splits and stock dividends.

a.  If the firm declares a​ 3-for-2 stock​ split, the new balance in the common stock account after the split is

​$_____

  ​(Round to the nearest​ dollar.)

Preferred stock	​ $ ​ 1,000,000
Common stock ​(120 comma 000120,000 shares at ​$66 ​par)	720 comma 000720,000
​Paid-in capital in excess of par	​1,700,000
Retained earnings	Modifying 10 comma 000 comma 000 with underline  10,000,000
Total​ stockholders' equity	Modifying $ 13 comma 420 comma 000 with double underline$13,420,000

Answer 1

a. What effect on​ Mammoth's equity account would result from the stock

split​?

A stock spilt is a financial restructuring action that increases the number of shares, which in turn diminishes share price.

Mammoth's equity stock will be increased to 3 shares for each 2 shared he is having while share price will decrease.

b. What change in stock price would you expect to result from the stock​ split?

Stock prices will diminish.