Chapter 12, Problem 1PA

Summary Introduction

(a)

To determine:

Value of investment prior to the split.

Introduction:

Stock Split is the breakdown of shares of a company which increases the number of shares available to trade in market without affecting the market value or market capitalization of company.

Explanation of Solution

Given,

Number of shares is 200 shares.

Price per share is $90.

Formula to calculate value of investment is,

$\text{Investement}\text{value}=\text{Number}\text{of}\text{shares}\times \text{Price}\text{per}\text{share}$

Substitute 200 for number of shares and $90 for price per share in above equation.

$\begin{array}{c}\text{Investement}\text{value}=200\times \$90\\ =\$18,000\end{array}$

Investment value is $18,000.

Conclusion

Hence, the investment value before share split is $18,000.

Summary Introduction

(b)

To determine:

Number of shares owned after stock split of three-for-one.

Introduction:

Three-for-one split means that for every single share held by a shareholder will now be three.

Explanation of Solution

Given,

Number of shares is 200 shares.

Split Ratio is three-for-one.

Formula to calculate new number of shares,

$\text{New}\text{number}\text{of}\text{shares}=\text{Number}\text{of}\text{shares}\times \text{Split}\text{ratio}$

Substitute 200 for number of shares and 3 for split ratio in above equation.

$\begin{array}{c}\text{New}\text{number}\text{of}\text{shares}=200\times 3\\ =600\end{array}$

Number of shares after split is 600 shares.

Conclusion

Hence, the number of shares after three-for-one share is 600 shares.

Summary Introduction

(c)

To determine:

Price of shares after the split.

Introduction:

Price of share after split is adjusted with the market price by dividing the share price before stock split and the split ratio.

Explanation of Solution

Given,

Price per share is $90.

Split ratio is three-for-one.

Formula to calculate price of share after stock split,

$\text{New}\text{share}\text{price}=\frac{\text{Price}\text{per}\text{share}}{\text{Split}\text{ratio}}$

Substitute $90 for price per share and 3 for split ratio in the above equation.

$\begin{array}{c}\text{New}\text{share}\text{price}=\frac{\$90}{3}\\ =\$30\end{array}$

New share price after split is $30.

Conclusion

Hence, the new share price after three-for-one stock split is $30.

Summary Introduction

(d)

To determine:

Value of investment after three-for-one split.

Introduction:

Value of investment after split

remains the same as before the stock split because there is no change in the value or price of shares.

Explanation of Solution

Given,

Number of shares after stock split is 600 shares.

Price per share after stock split is $30.

Formula to calculate value of investment is,

$\text{Investement}\text{value}=\text{Number}\text{of}\text{shares}\times \text{Price}\text{per}\text{share}$

Substitute 600 for number of shares and $30 for price per share in the above equation.

$\begin{array}{c}\text{Investement}\text{value}=600\times \$30\\ =\$18,000\end{array}$

Investment value after stock split is $18,000.

Conclusion

Hence, the investment value after three-for-one share is $18,000.