Question

common stock with a price of $80.00 per share and 200,000 shares of common stock outstanding....

common stock with a price of $80.00 per share and 200,000 shares of common stock outstanding. Their Chief Financial Officer believes that a 2-for-1 Stock-Split would make the firms stock more liquid.

    1. What is the Old Market-Cap?
    1. What is the New Market Price and New Shares Outstanding?
    1. How much did the Market-Cap Change?
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Answer #1

Sol:

Outstanding shares = 200000

Stock price = $80 per share

Stock split ratio = 2 for 1 means an additional share will be given for each share held by a shareholder.

a)

Old market cap = Outstanding shares x Stock price

Old market cap = 200000 x $80 = $16,000,000

b)

New Outstanding shares = 200000 x 2 = 400000

New market price = $80 / 2 = $40

c)

New market cap = New Outstanding shares x New Stock price

New market cap = 400000 x $40 = $16,000,000

After a stock split, the stock price will be reduced in the ratio of the split, and the number of shares outstanding will increased as per the ratio. Therefore, although the number of outstanding shares and the stock price will change, the market capitalization will remains constant and unchanged.

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