Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders equity position shown. The

Question:

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 are included in retained earnings.

Preferred stock ..............$ 1,000,000

Common stock (100,000 shares at $3 par) .....300,000

Paid-in capital in excess of par .......1,700,000

Retained earnings..............10,000,000

Total stockholders’ equity........$13,000,000

a. What effects on Mammoth 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.

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