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Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholder’s equity position shown. The current stock price is $120 per share. The most recent period’s earning available for common stock is 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 stockholder equity $13,000,000
a. What effects on Mammoth would result in a 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 answer in parts a through c with the circumstances surrounding a 50% stock dividend
e. Explain the differences between stock splits and stock dividend.