The Alligator Lock Company is planning a two-for-one stock split. You own 5,000
ID: 2770132 • Letter: T
Question
The Alligator Lock Company is planning a two-for-one stock split. You own 5,000 shares of Alligator's common stock, which is currently selling for s123 a share. a. What is the total value of your Alligator stock now? $615000 What will the total value of your Alligator stock be after the split? $ b. Alligator's CFO says that the value of the shares will decline less than proportionately with the split because the stock is now out of its trading range. If the decline is 45%, how much will the split make you? $Explanation / Answer
a. Total Value of Alligator Stock = $123 x 5,000 = $615,000
b. In standard scenario, stock split decreases the price of stock in the same proportion as market incorporates the impact. so, the value will be $615,000 only even after the split.
c. Value after decline = $123 - ($123 x 45%) = $67.65
Number of shares after split = 5,000 x 2 = 10,000
Value of shares = $67.65 x 10,000 = $676,500
Profit from split = $676,500 - $615,000 = $61,500
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