Whited Products recently completed a 4-for-1 stock split.Prior to the split, its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?

Question

Quizplus · Accepted Answer

After the 4-for-1 stock split, each shareholder would have four times the number of shares they owned before the split, and each share would be worth one-fourth of its original value. So, the new stock price would be:

$120 / 4 = $30 per share

Since the company's total market value increased by 5% after the split, the new market value would be:

$120 x 4 x 1.05 = $504

Dividing the new market value by the new stock price gives:

$504 / $30 = $16.80

This means that each share is now worth $16.80 after the split. However, we need to adjust for the fact that the original stock price was $120 per share, not $30 per share. To do this, we need to multiply the new price by the original stock price:

$16.80 x 4 = $67.20

The final answer is therefore:

$67.20 / 2 = $31.50 per share

Therefore, the best choice is C.

Whited Products Recently Completed a 4-For-1 Stock Split