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 3-for-2 stock split, the total number of outstanding shares will be increased by 50% (half of the current outstanding shares). 
New number of shares = 15,000 x 1.5 = 22,500

However, the total equity (par value + additional paid in capital + retained earnings) will remain the same.

New par value per share = 1/1.5 = £0.67 
New equity per share = (15,000 + 315,000 + 189,000)/22,500 = £18.40

Therefore, the new market price per share will be the old market price (£36) divided by the 1.5 stock split ratio: 
New market price per share = £36/1.5 = £24

Thus, the correct answer is B.

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