A Company Whose Shares Are Currently Trading at $3

question 79

Multiple Choice

A company whose shares are currently trading at $3.60 proposes to have a 25% split; that is,four new shares for one existing share.At the commencement of the next business day,a dividend of 25 cents is paid on existing shares,followed immediately by the share split.What is the theoretical price of the new shares?

• A) $0.72
• B) $0.90
• C) $2.70
• D) $3.35

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Definitions:

Implicit Interest Rate

Implicit interest rate is the interest rate implied in the terms of a lease or loan, calculated based on the initial amount and the future payments or receipts.

Incremental Borrowing Rate

The interest rate a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.

Salvage Value

The estimated resale value of an asset at the end of its useful life, considered in depreciation calculations.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts, representing the asset's expense.