A company has just announced a 3-for-1 stock split, effective immediately. Prior
ID: 2777075 • Letter: A
Question
A company has just announced a 3-for-1 stock split, effective immediately. Prior to the split, the company had a market value of $5 billion with 100 million shares outstanding. Assuming that the split conveys no new information about the company, A. What is the value of the company, the number of shares outstanding, and price per share prior to the split? B. What is the value of the company, the number of shares outstanding, and price per share after the split? C. If the actual market price immediately following the split is $17.00/share, what does this tell us about market efficiency?
Explanation / Answer
prior to the split
value of the company = 5,000,000,000
number of shares outstanding = 100,000,000
price per share = value of the company/number of shares outstanding = 5,000,000,000/100,000,000 = $50
After the split
value of the company = 5,000,000,000
number of shares outstanding = 100,000,000* 3 = 300,000,000
price per share = value of the company/number of shares outstanding = 5,000,000,000/300,000,000 = $16.667
c. actual market price is greater than theorectical market price which shows market is efficient because more number of investors are able to afford the stock after the split as price decreased from 50 to 16.666 causing demand to increase and subsequently increase in price to $17
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