Question

Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Answer 1

A 3 -for- 1 stock split means that the shareholders will receive 3 shares for every single share that was held by them. The total value of the shares will remain unchanged.

The price of each share is \(\$ 90\). So the price of the stock after the stock split will be calculated as follows:

$$ \begin{aligned} \text { Price after stock split } &=\frac{\text { Total market value of the shares }}{\text { Number of shares }} \\ &=\frac{\text { Price of the share } \times \text { Number of shares }}{\text { Number of shares }} \end{aligned} $$

Due to the stock split the number of shares has increased. So the number of shares will be three times of the initial number of shares.

$$ \begin{aligned} \text { Pricc after stock split } &=\frac{\$ 90 \times x}{3 x} \\ &=\frac{\$ 90}{3} \\ &=\$ 30 \end{aligned} $$

So the new stock price is \(\$ 30\)

Thus we can say that when there is a stock split then the market value of the stock decreases