Question

Iman owns 400 shares of food company Sedap Food Berhad which he purchased during the recession in January 2017 for RM35 per share. Sedap Food Berhad is regarded as a relatively safe company because it provides a basic product that consumer need in good and bad economic times. Iman read in the Malaysian Business Magazine that the company’s board of director had voted to split the stock 2-for-1. In June 2018, just before the stock split, Sedap Food Berhad shares were trading for RM75.14.

Answer the following questions about the impact of the stock split on his holdings.

1. How many shares of Sedap Food Berhad will Iman own after the stock split?

  

2. Immediately after the split, what do you expect the value of Sedap Food Berhad to be?

3. Compare the total value of Iman’s stock holdings before and after the split, given that the price of Sedap Food Berhad stock immediately after the split was RM37.50. What do you find?

  

4. Does Iman experience a gain or loss on the stock as a result of the 2-for -1 split?

Answer 1

a How many shares of Sedap Food Berhad will Iman own after the stock split

Number of share owned before stock split: 400

Number of shares after stock split=400*2=800

Immediately after the split, what do you expect the value of Sedap Food Berhad to be?

Value before split=400*35=14000

Share price after split=35/2=17.5

Value after split=800*17.5=14000

a. Compare the total value of Iman’s stock holdings before and after the split, given that the price of Sedap Food Berhad stock immediately after the split was RM37.50. What do you find?

If stock price immediately after split is RM37.5

Total value =800*37.5=30000

The price increase after split is unlikely

Does Iman experience a gain or loss on the stock as a result of the 2-for -1 split?

Normally, there would not be any gain or loss after stock split.

Stock split do not create shareholders wealth