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Part A : Southwest Tires declares a 3?-for-2 stock split
Part A :
Southwest Tires declares a 3?-for-2 stock split. The current price is ?$60 per? share, and you own 400 shares. What is the expected share price after the? split? What is your wealth before the? split? ? After?
Part B :
Northeast Tires announces a reverse split. The company will consolidate outstanding shares through a 4?-for-7 split. That? is, the company will consolidate every 7 shares that you currently own into 4 shares. The current stock price is ?$3 per share. What will the share price be after the? split? If you own 18,000 ?shares, how many will you have after the reverse? split? What will your wealth in stock be after the? split?
Expert Solution
A:
Computation of Expected Share Price after the? Split:
Share price will remain the same after the the split also.
So, Share Price is $60 per share.
Computation of Wealth before Split:
Wealth before split= Number of Shares*Expected Price
Wealth before split= 400*$60 = $24,000
Computation of Wealth after Split:
Number of shares after split= 400*3/2 = 600 shares
Wealth after split= 600*$60 = $36,000
B:
Computation of Share price after the split:
Share price after the split = Share price before the split * (1 / Split ratio)
Share price after the split = $3 * (1 / (4/7))
Share price after the split = $5.25
Computation of No. of shares after the split:
No. of shares after the split = No of shares before the split * split ratio
No. of shares after the split = 18,000 * (4 / 7)
No. of shares after the split = 10,285.71
Computation of Wealth in stock after split:
Wealth in stock after split = No of shares after the split * Share price after the split
Wealth in stock after split = 10,285.71 * $5.25
Wealth in stock after split = $54,000
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