Grullon Co.is considering a 7-for-3 stock split.The current stock price is $75.00 per share, and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?

Question

Quizplus · Accepted Answer

Before the split, the company has 3/7 the current number of shares outstanding. 
After the split, the company will have 7/3 times the current number of shares outstanding. 
Therefore, the new stock price should be 3/7 of the current stock price: 
$75.00/7*3=$32.14
However, the company believes that its total market value would increase by 5% as a result of the split. 
So the expected new stock price is: 
$32.14+(5%*$32.14)= $33.75
Therefore, the expected stock price following the split is $33.75. 
The correct answer is B.