Question

1. Verizon Wireless has just announced a 2-for-1 stock split, effective immediately. Prior

to the split, Verizon Wireless had a market value of $10 billion with 200 million shares

outstanding.

a) Assuming that the split conveys no new information about the company, what is the

value of the company, the number of shares outstanding, and price per share after the

split?

b) If the actual market price immediately following the split is $34.00 per share, what does

this tell us about market efficiency?

Answer 1

a) Value of company = $10 billion or $10,000 million

[ Spilt of share do not affect the value of the company]

No of shares outstanding = 200 * 2 = 400 million shares

Value per share = 10,000/400 = $25 per share

b)

If the actual price before the split is $34.00 per share, this price appears to be greater than it should be. This would suggest that the stock split has conveyed some sort of knowledge about the company resulting in the stock being priced more. It could be seen as some sort of anomaly happened and the market might not be correct at all.