Grullon Co.is considering a 7-for-3 stock split.The current stock price is $75.00 per share,and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?
A)$32.06
B)$33.75
C)$35.44
D)$37.21

Question

Quizplus · Accepted Answer

A 7-for-3 stock split means that for every 3 shares an investor currently owns, they will receive 7 new shares. Therefore, the total number of shares outstanding will increase by a factor of 7/3 = 2.33.

If the current stock price is $75.00 per share, after the split, the new stock price can be calculated as follows:
New Stock Price = (Current Stock Price * 2.33) * (1 + 5%)
New Stock Price = ($75.00 * 2.33) * 1.05
New Stock Price = $174.26 / 2.33 
New Stock Price = $33.75

Therefore, the stock's expected price following the split is $33.75.