SesameSweet Inc. has 220,000 shares outstanding with a market price of $12 per share. On the balance sheet, common stock is $760,000, and retained earnings are $275,000. There are no transactions costs.

Suppose SesameSweet declares a 3-for-1 stock split. What is the market price of a share of the company's stock after the split?

Question

SesameSweet Inc. has 220,000 shares outstanding with a market price of $12 per share. On the balance sheet, common stock is $760,000, and retained earnings are $275,000. There are no transactions costs.

Suppose SesameSweet declares a 3-for-1 stock split. What is the market price of a share of the company's stock after the split?

Quizplus · Accepted Answer

After a 3-for-1 stock split, each existing share is divided into three shares, effectively tripling the number of shares outstanding. The total market value of the company doesn't change; only the number of shares and price per share adjust. Therefore, the new price per share is $12 (original price) divided by 3 (split ratio), resulting in $4.00 per share.