The Mining Co. has 110,000 shares of stock outstanding. The current market value of the ﬁrm is $5.5 million. The company has retained earnings of $1.8 million, paid in surplus of $2.2 million, and
A common stock account value of $.11 million. The company is planning a 5-for-1 stock split. What
Will the par value per share be after the split?

Question

Quizplus · Accepted Answer

Before the split, the total market value of the company is $5.5 million, so the market value per share is $5.5 million / 110,000 shares = $50 per share. After the split, there will be 5 times as many shares outstanding, or 550,000 shares. Since the total market value of the company is still $5.5 million, the market value per share will be $5.5 million / 550,000 shares = $10 per share. The par value per share will be adjusted accordingly, so the new par value per share will be $10 / 5 = $2.00. However, the question asks for the par value per share after the split, not before, so we need to divide the current par value of $0.11 by 5 as well, giving us a new par value per share of $0.022, or $0.02 rounded to the nearest cent. Therefore, the answer is B.