A company has just announced a 3-for-1 stock split, effective immediately. Prior to the split, the...
A company has just announced a 3-for-1 stock split, effective immediately. Prior to the split, the company had a market value of $4 billion with $100 million shares outstanding. Suppose the split conveys no new information about the company. Answer the following questions indicating how you arrived at your answer in each case.
a) What is the value of the company?
b) What is the number of shares outstanding?
c) What is the price per share after the split?
d) If the actual market price immediately following the split is $20 per share, what does this tell you about market efficiency?
Homework Answers
| A company has just announced a 3-for-1 stock split, effective immediately. Prior to the split, the company had a market value of $4 billion with $100 million shares outstanding. Suppose the split conveys no new information about the company. Answer the following questions indicating how you arrived at your answer in each case. |
| a) What is the value of the company? |
| Ans: Value of the Company remain at $4 billion, even after split. |
| b) What is the number of shares outstanding? |
| Ans: Share outstanding will be $300million after announcement of 3 for 1 stock split. 3 for 1 stock split means there will be three share now instead of one share. |
| c) What is the price per share after the split? |
| Ans: Price per share after split is $13.33 per share (i.e market value $4 billion/$300 million share) |
| d) If the actual market price immediately following the split is $20 per share, what does this tell you about market efficiency? |
| Ans: After stock split the Companies outstanding share is increased, which in turns diminishes its price. The stock market capitalization of the company, however, remain the same. Hence, If the actual market price immediately following the split is $20 per share instead of $13.33 as calculated in point no.C, indicate the market has not efficiently capture the stock split. |
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