Which of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split?
A)investors will triple their wealth after the split
B)investors' wealth will fall by two-thirds after the split
C)%age of ownership increases for the investors
D)earnings per share will fall by two-thirds after the split

Question

Quizplus · Accepted Answer

In a three-for-one stock split, each share an investor holds is divided into three, which increases the number of shares but does not inherently change the total value of their investment. Therefore, while the number of shares owned by an investor increases, the price per share adjusts so that the total market value of their holdings remains the same, and their percentage of ownership in the company does not change. However, because the earnings are now spread over a larger number of shares, the earnings per share (EPS) will decrease, assuming the total earnings remain constant. This is why option D is correct; the EPS will fall, but not necessarily by two-thirds, as the exact amount depends on the new total number of shares compared to the old.

Which of the Following Statements Is Correct About Investors in Ajax