Question

Brinkley Resources stock has increased significantly over the last five years, selling now for $145 per share. Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share? Select the correct answer. a. 6.88 b. 7.42 c. 6.34 d. 7.96 e. 5.80

Answer 1

Answer: Option e

A stock split leads to increase in number of shares outstanding, but it does not increase the market value of the firm after the event.

Total market value of firm = Number of shares * Share Price

Number of shares pre-split * Share price pre-split = Number of shares post-split * Share price post-split

Number of shares pre-split * $145 = Number of shares post-split * $25

Number of shares pre-split/Number of shares post-split = $145/$25 = 5.80