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Chapter 13: Problem 20

Mia Restaurant Corporation wholesales ovens and ranges to restaurants throughout the Southwest. Mia Restaurant Corporation, which had 40,000 shares of common stock outstanding, declared a 4 -for-1 stock split (3 additional shares for each share issued). a. What will be the number of shares outstanding after the split? b. If the common stock had a market price of \(\$ 300\) per share before the stock split, what would be an approximate market price per share after the split?

Short Answer

Expert verified
After the split, there will be 160,000 shares outstanding, and the approximate market price per share would be \$75.

Step by step solution

01

Understanding the Stock Split

A 4-for-1 stock split means each existing share is divided into 4 shares. This means for every 1 share you originally own, you will now own 4 shares.
02

Calculating New Shares Outstanding

Mia Restaurant Corporation had 40,000 shares originally. After a 4-for-1 stock split, each original share is split into 4. Thus, the new number of shares is calculated as \( 40,000 \times 4 = 160,000 \) shares.
03

Understanding Market Price Post Split

The stock split increases the number of shares, but the total market value of all shares remains the same. Therefore, the market price per share typically decreases to reflect the increased number of shares.
04

Calculating New Market Price Per Share

Before the split, the market price was \( \\(300 \) per share. After the split, since each share is now split into 4, the new price per share is calculated as \( \frac{300}{4} = \\)75 \) per share.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Shares Outstanding
When a company like Mia Restaurant Corporation declares a stock split, it's a way of increasing the number of shares available. In this scenario, the company executed a 4-for-1 stock split. This means for every one share an investor held, they now own four shares.

Let's break it down further. Originally, Mia Restaurant Corporation had 40,000 shares outstanding. After the stock split, the number of shares increases. To calculate the new number of shares, you multiply the original shares by the split ratio. That is:
  • Original shares: 40,000
  • Stock split: 4-for-1
  • New shares outstanding: 40,000 * 4 = 160,000
The increase in shares doesn't change the ownership percentages of shareholders, but each share now represents a smaller percentage of the company. This can attract more investors because the share price post-split is typically more affordable.
Market Price Adjustment
A stock split also leads to an adjustment in the market price per share. While the number of shares has increased, the overall market capitalization of the company remains unchanged. This means the value of the company as a whole doesn't change, only the number of shares available does.

Before the stock split, each share of Mia Restaurant Corporation was valued at $300. With the 4-for-1 split, each share must now represent a smaller fraction of the total company value. Here's how the market price adjusts:
  • Pre-split price per share: $300
  • Split factor: 4
  • New price per share: $300 梅 4 = $75
Thus, after the split, the market price adjusts to $75 per share. The key is to remember that the market price adjustment keeps the overall value constant 鈥� it's the same pie, just with more slices.
Financial Calculations
To fully understand stock splits, it's crucial to grasp some simple financial calculations involved. A stock split doesn't inherently change the company's market value. Instead, it adjusts the share metrics, aiding liquidity and potentially attracting investors by making shares more affordable.

In this exercise, we saw:
  • To calculate the new shares outstanding, use: Original shares x Split factor = New shares
  • For new market price per share: Pre-split price 梅 Split factor = New price
These calculations show the relative changes in shares and price, helping investors understand how their investment might be reshaped. While the numerical value per share changes, the total value of holdings remains the same, maintaining investor confidence.

It鈥檚 important that students understand these calculations as they provide the foundation for grasping more complex financial topics in the future.

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Most popular questions from this chapter

Organic Health Co. is an HMO for businesses in the Chicago area. The following account balances appear on the balance sheet of Organic Health Co.: Common stock ( 300,000 shares authorized), \(\$ 100\) par, \(\$ 10,000,000\); Paid-in capital in excess of parcommon stock, \(\$ 2,000,000\); and Retained earnings, \(\$ 45,000,000\). The board of directors declared a \(2 \%\) stock dividend when the market price of the stock was \(\$ 125\) a share. Organic Health Co. reported no income or loss for the current year. a. Journalize the entries to record (1) the declaration of the dividend, capitalizing an amount equal to market value, and (2) the issuance of the stock certificates. b. Determine the following amounts before the stock dividend was declared: (1) total paid-in capital, (2) total retained earnings, and (3) total stockholders' equity. c. Determine the following amounts after the stock dividend was declared and closing entries were recorded at the end of the year: (1) total paid-in capital, (2) total retained earnings, and (3) total stockholders' equity.

Fairmount Inc., a developer of radiology equipment, has stock outstanding as follows: 15,000 shares of cumulative \(2 \%\), preferred stock of \(\$ 150\) par, and 50,000 shares of \(\$ 5\) par common. During its first four years of operations, the following amounts were distributed as dividends: first year, \(\$ 30,000\); second year, \(\$ 42,000\); third year, \(\$ 90,000\); fourth year, \(\$ 120,000\). Calculate the dividends per share on each class of stock for each of the four years.

On June 4, Magic Carpet Inc., a carpet wholesaler, issued for cash 250,000 shares of nopar common stock (with a stated value of \(\$ 3\) ) at \(\$ 12\), and on October 9, it issued for cash 25,000 shares of \(\$ 75\) par preferred stock at \(\$ 80\). a. Journalize the entries for June 4 and October 9 , assuming that the common stock is to be credited with the stated value. b. What is the total amount invested (total paid-in capital) by all stockholders as of October 9?

Rocky Mountain Sounds Corp., an electric guitar retailer, was organized by Cathy Dewitt, Melody Leimbach, and Mario Torres. The charter authorized 250,000 shares of common stock with a par of \(\$ 40\). The following transactions affecting stockholders' equity were completed during the first year of operations: a. Issued 10,000 shares of stock at par to Cathy Dewitt for cash. b. Issued 750 shares of stock at par to Mario Torres for promotional services provided in connection with the organization of the corporation, and issued 20,000 shares of stock at par to Mario Torres for cash. c. Purchased land and a building from Melody Leimbach. The building is mortgaged for \(\$ 400,000\) for 20 years at \(7 \%\), and there is accrued interest of \(\$ 7,000\) on the mortgage note at the time of the purchase. It is agreed that the land is to be priced at \(\$ 125,000\) and the building at \(\$ 600,000\), and that Melody Leimbach's equity will be exchanged for stock at par. The corporation agreed to assume responsibility for paying the mortgage note and the accrued interest. Journalize the entries to record the transactions.

Staples and OfficeMax are two companies competing in the retail office supply business. OfficeMax had a net income of \(\$ 91,721,000\) for a recent year, while Staples had a net income of \(\$ 973,577,000\). OfficeMax had preferred stock of \(\$ 54,735,000\) with a preferred dividend of \(7.375 \%\) on that amount. Staples had no preferred stock. The outstanding common shares for each company were as follows: \begin{tabular}{lr} & Common Shares \\ \hline OfficeMax & \(73,142,000\) \\ Staples & \(720,528,000\) \end{tabular} a. Determine the earnings per share for each company. b. Evaluate the relative profitability of the two companies.
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