Kelly owns 10,000 shares in McCormick Spices, which currently has 500,000 shares outstanding. The stock sells
for $86 on the open market. McCormick's management has decided on a two-for-one split.
a. Will Kelly's financial position change after the split, assuming that the stock's price will fall
proportionately?
Trevor Corporation - Stock Split
Market price $86.00
Split multiple 2
Shares outstanding 500,000
b. Assuming only a 35% decrease in the stock price, what will be Kelly's value after the split?
a.
Investor's shares = 10,000
Position before split $860,000 = 10,000 shares × $86 per share
Price after split $43.00 = $86/2
Your shares after split 20,000 = 10,000 × 2
Position after split $860,000 = 20,000 shares × $43 per share
Net gain $0
b.
Price fall 0.35
Price after split $55.90 = $86.00(1-.35)
Position after split $1,118,000 = 20,000 shares × $55.90 per share
Net gain $258,000 = $1,118,000-$860,000
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