Background info: Skoll Technologies is considering a 3-for-1 stock split on its

Question

Background info:

Skoll Technologies is considering a 3-for-1 stock split on its common stock. Skolls current stock price is $45.00 per share, and the stock split is supposed to be only an accounting change that doesn't affect a firm's value directly. If the stock split does not affect the firm's value, what is Skoll's expected stock price after the split?($15 dollars)


QUESTION -- Please show your work:

An analyst covering Skoll's stock thinks the stock split is a positive signal that the firm expects its stock price to continue rising. He thinks a 3-for-1 stock split will result in a favorable from the market and the firm's market capitalization will increase by 4%. If the market does react this way to the split, what is its expected stock price after split?

Explanation / Answer

With the expectation that the firm's market capitalization will increase by 4%.
The stock value will also increase by 4%

Expected stock price after split will be $45*(1.04)/3 = $15.6

                    # of stock       price          value

Before                1                $45            $45

After                  3               $15.6        $46.8

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