Krzys’ Ostaszewski, http://www.math.ilstu.edu/krzysio/, Exercise 82, 12/9/6
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Spring 2000 Casualty Actuarial Society Course 8 Examination, Problem No. 25
(multiple choice answers added)
There is an outstanding call option to buy 100 shares of a company with a strike price of
$20. The company then declares a 10% stock dividend. Calculate the number of shares
the option holder would have the right to purchase after the stock dividend and the new
strike price of the call option after the stock dividend. Note from KO: The 10% stock
dividend is not an ordinary dividend.
A. 100 shares, $20.00
B. 110 shares, $20.00
C. 100 shares, $18.18
D. 110 shares, $18.18
E. 90 shares, $22.00
Solution.
Since this is not an ordinary dividend, we treat the stock dividend as an 11 for 10 stock
split. This results in the option contract becoming a contract for 110 shares. But
remember that any dividend results in the total value of shares plus dividend equal to the
value of shares just a moment before the dividend is declared, so that 100 shares at $20
are worth $2000, and 110 shares must be also worth $2000, with resulting price being
approximately $18.18.
Answer D.
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