XYZ has 400,000 shares of common stock outstanding, a P/E ratio of 8, and $500,0
ID: 2665278 • Letter: X
Question
XYZ has 400,000 shares of common stock outstanding, a P/E ratio of 8, and $500,000 available for common stockholders. The board of directors has just voted a 3:2 stock split.a. If you had 100 shares of stock before the split, how many
shares will you have after the split?
3/2 = 1.5 * 100 = 150 ??
b. What was the total value of your investment in XYZ stock
before the split?
c. What should be the total value of your investment in XYZ
stock after the split?
d. In view of your answers to (b) and (c) above, why would a
firm's management want to have a stock split?
Explanation / Answer
a. 3/2 = 1.5
1.5 * 100 = 150 shares
b.P/E =8
EPS = $500,000/400,000 = $1.25
P/E = market price per share/earning per share
8 = MP/1.25
Mp = $10
total value = shares * market price per share
The total value of your investment in XYZ stock before the split = $10 * 100 = $1000
c. Total number of shares after split = 3/2 *400000 = 600,000
MP = 10 *2/3 = 6.67
Number of shares after split = 3/2 *100 = 150
The total value of your investment in XYZ stock after the split = $6.67 * 150= $1000
d. a firm's management want to have a stock split because to increase the number of shares outstanding but their will be no change in value of shares of an investor.
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