Robinson's has 15,000 shares outstanding with a par value of £1.00 per share and a market price of £36 a share.The statement of ﬁnancial position shows £15,000 in the ordinary equity account,
£315,000 in the additional paid in capital account, and £189,000 in the retained earnings account.
The ﬁrm just announced a 3-for-2 stock split.What will the market price per share be after the split?

Question

Quizplus · Accepted Answer

After the split, the number of outstanding shares will increase by 50% (3-for-2 means there will be 3 shares for every 2 shares currently outstanding), so there will be 22,500 shares outstanding. The total equity remains the same, so the new par value will be £1/1.5 = £0.67 per share. The new total equity will be £15,000 + £315,000 + £189,000 = £519,000, which divided by 22,500 shares gives a book value per share of £23.07. However, since the market price was previously £36 per share, we can assume that the market value is higher than the book value, so the market price per share after the split will likely be higher than £23.07, but not as high as the original £36. The closest option is B) £24 per share.

Robinson's Has 15,000 Shares Outstanding with a Par Value of £1.00