Question

Answer this question: If a company declares a 2 for 1 stock split when its stock was trading for $40 just prior to the announcement and it has 2 million shares outstanding, what will the theoretical market price of the stock be just after the stock split? Are stockholders better off? *I know that there are a lot of answers for this question, but if you can answer this in your own interpretation I would really appreciate it. Thank you!

Answer 1

As the stock split is 2 for 1, so 1 share will be broken into two and the share price will become half. $40 will become $20.

The market value holding of each shareholder will be the same, as the share price will become half and the number of share holdings will double. So wealth wise, there will be no notable change to the shareholders. But, as the share price will decrease, so many new investors will be able to invest in the share as it has turned cheap and the liquidity will increase, so the price of the share will increase in future and the shareholders will profit.

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