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    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 Preview

    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 ...

    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.