Question

An investor purchased 300 shares of ABC Company when it IPO’d at $30 per share. Two years later, the company executed a 3 for 2 stock split when the shares were trading at $45. One year after that, the investor sold 200 shares at $40. What is her profit on the sale?

a$2,000

b$2,500

c$3,000

d$4,000

Answer 1

Solution :

As per the information given in the question we have

Original Number of shares purchased = 300 shares ; Original purchase price of each share = $ 30 per share ;

Stock split ratio = 3 for 2

Thus the adjusted Number of shares purchased ( after the stock split ) shall be equal to

= Original Number of shares Purchased * Stock split ratio

= 300 shares * ( 3 / 2 )

= 450 shares

The adjusted purchase price per share = Original purchase price of each share / stock split ratio

= $ 30 / [ (3 / 2 ) ]

= $ 30 / 1.5

= $ 20

Calculation of Profit on sale :

As per the information available we have

Number of shares sold = 200 shares ; Adjusted purchase price after stock split = $ 20 ;

Sale price per share = $ 40

Thus the profit on sale = ( Sale price per share - Adjusted purchase price after stock split ) * Number of shares sold

= ( $ 40 - $ 20 ) * 200

= $ 20 * 200

= $ 4,000

Thus the profit on sale of share = $ 4,000

The solution is option d. $ 4,000