tini Case is available in MyFinancelab s nth finance. re that you write a column

Question

tini Case is available in MyFinancelab s nth finance. re that you write a column for a very widely followed financial blog titled ions: Ask the Expert." Your job is to field readers' questions that deal This week you are going to address two questions from your readers at have to do with dividends. Ques edlared its plans to engage in a 2-for-1 stock split. tion 1: Iown 8 percent of the Standlee Corporation's 30,000 shares of common which most recently traded for a price of $98 per share. The company has since a. What will my financial position be after the stock split, compared to my cur- rent position? (Hint: Assume the stock price falls proportionately.) b. The executive vice-president in charge of finance believes the price will not fall in proportion to the size of the split and will only fall 45 percent because she thinks the pre-split price is above the optimal price range. If she is correct what will be my net gain from the split? L liuoat tors of the B Phillios Corporation, and Phil-

Explanation / Answer

Question 1:

a)

Statement of reconstruction with 2 for 1 stock split:

Particulars

Before split of stocks ($)

After split of stocks ($)

Common Stock
(No. of shares * share price)

No. of shares = 30000*0.08
                        = 2400
(2400 * $98)

Common Stock
No of shares = 2400 * 2 = 4800
(No. of shares * share price)

(4800 * $49)

235,200

235,200

235,200

235,200

b)

Statement of calculation of overall wealth of executive vice-president:

Particulars

Amount after Split

Current value of common stock (4800 *$53.90)

$258,720

Value of common stock before split (2400 * $98)

($235,200)

Total (net) gain from the split process

$23,520

Calculation of Market price of share after split process:

Value fallen per share = $98 * 0.45 = 44.10
Market price per share = $98 - $44.10 = $53.90

Particulars

Before split of stocks ($)

After split of stocks ($)

Common Stock
(No. of shares * share price)

No. of shares = 30000*0.08
                        = 2400
(2400 * $98)

Common Stock
No of shares = 2400 * 2 = 4800
(No. of shares * share price)

(4800 * $49)

235,200

235,200

235,200

235,200

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