Suppose that the market price of Company A is $50 per share and that of Company B is $20. If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders?

A. - 25%.

B. - 20%.

C. - 20%.

D. + 25%.

D) + 25%.

Explanation:

If A offers 1/2 a share per 1 share of B, it means that the value of B's shares will increase from $20 to $25 ( = $50 x 1/2). This $5 increase represents a 25% increase in wealth { = [ ($25 - $20) / $20] x 100}.

The price of the stock represents the wealth of the stockholders, since a stockholder that had 100 shares previously owned $2,000 in stocks, but as the price increases, the stockholder's wealth increases to $2,500.