Value of an Investment After a Stock Split
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Company ABC currently has 100,000 shares of common stock outstanding and a price-earnings ratio of seven. Net income for the recently ended year is $375,000. Company ABC board of directors declared a 15-for-2 stock split. Company XYZ owned 100 shares of Company ABC before the split. What is the approximate value of Company XYZ investment in Company ABC immediately after the split?
a) $26
b) $350
c) $2,625
d) $5,250
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Solution Summary
Given the number of shares held as an investment, the company's net income, the price-earnings ratio, and the stock split, this solution illustrates how to compute the value of the investment after the split.
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A stock split has a non-dilutive effect for existing shareholders; that is, they own the same proportion of shares after the split as they owned prior to it. In this case, Company ABC split its 100,000 ...
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