Downie Foods recently completed a 4-for-1 stock split.Prior to the split, its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?
A) $28.43
B) $29.93
C) $31.50
D) $33.08
E) $34.73

Question

Quizplus · Accepted Answer

After the split, the number of shares increases by a factor of 4 and the price per share decreases by a factor of 4. So, the new price per share would be:

$120 / 4 = $30

If the firm's total market value increased by 5%, this means its new market value would be:

$120 * 4 * 1.05 = $504

To find the new price per share based on this market value, we divide the market value by the new number of shares:

$504 / 16 = $31.50

Therefore, the new stock price following the split would be $31.50, which is choice C.

Downie Foods Recently Completed a 4-For-1 Stock Split