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, Whited Products would have 4 times the number of outstanding shares, so the price per share would need to decrease to maintain the same market value. Before the split, the market value of Whited Products was $120 per share x N shares = $V. After the split, the market value is $V + 5% = $1.05V. Since there are now 4N shares outstanding, the price per share following the split would be:

Price per share = $1.05V / (4N) 
Price per share = ($120 per share x N shares x 1.05) / (4N) 
Price per share = ($126 per share) / 4 
Price per share = $31.50

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