You own 8% of the Standlee Corporation%u2019s common stock, which most recently

Question

You own 8% of the Standlee Corporation%u2019s common stock, which most recently sold for $98 before the announcement of a two-for-one stock split. Before the split, there are 30,000 shares of common stock outstanding.

a. Relative to now, what will be your financial position after the stock split? (Assume the stock price falls proportionately.)

b. The executive vice-president in charge of finance believes the price will fall only 45% after the split because she thinks the price is above the optimal price range. If she is correct, what will be your net gain?

Explanation / Answer

a. You own Investors' shares Position before split Price after split Your shares after split Position after split Net gain b. Price fall Price after split Position after split Net gain $ 98.00 2 30,000 0.08 = 2,400 $235,200 49.00 4,800 $235,200 $ 0 0.45 $ 53.90 $258,720 $ 23,520 x 30,000 = 2,400 Shares x $98 per share = $98 2 = 2,400 x 2 = 4,800 shares x $49 per share $ = $98.00 (1 - .45) = 4,800 Shares x $53.90 per share = $258,720 - $235,200

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