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 2-1 split
a. Will Kelly's financial position alter after the split, assuming that the stocks will fall proportionately?
b. Assuming only a 35% fall on each stock, what will be Kelly's value after the split?
Answer:
McCormick Spices Corporation - Stock Split
Market price $86.00
Split multiple 2
Shares outstanding 500,000
a.
Investor's shares = 10,000
Position before split $860,000 = 10,000 shares × $86 per share
Price after split $43.00 = $86/2
Kelly's 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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