In a three-for-two stock split for a company that previously had 1 million shares outstanding selling at $100 per share and a total market value of $100 million,which of the following is true?
A) The number of outstanding shares will drop to 666,666, and the stock price will increase to $150.
B) The number of outstanding shares will increase to 1.5 million, and the stock price will drop to $66.67.
C) The number of outstanding shares will increase to 1.5 million, and the stock price will rise to $133.33.
D) The market value of the firm will increase.

Question

Quizplus · Accepted Answer

In a three-for-two stock split, for every two shares held, shareholders will receive three shares. Therefore, the number of outstanding shares will increase to 1.5 million (1 million shares x 1.5) and the stock price will drop to $66.67 ($100 per share / 1.5). The total market value of the firm remains the same at $100 million ($66.67 x 1.5 million shares). Therefore, option B is the correct choice. Option A is incorrect because the number of outstanding shares will increase, not decrease, in a stock split. Option C is also incorrect because while the number of outstanding shares increases, the stock price decreases in a stock split. Option D is incorrect as the market value of the firm remains the same after a stock split.

In a Three-For-Two Stock Split for a Company That Previously