Question

1. Tip Top Corporation currently has 5000 shares outstanding and the current price per share is $63.00. Amy owns 145 shares of Tip Top. The board is thinking about doing a 2-3 stock split.

What is the total dollar value of Amy’s investment in Tip Top BEFORE the split? ______

How many total shares outstanding will Tip Top have AFTER the split? __________

What will be the share price AFTER the split? ____________

2. Instant Makeover Cosmetic Company has a return on its stock of 9%. If the Beta for this stock is .95 and the risk free rate is 3%, what is the rate expected in the marketplace? ________________

Answer 1

1) Here as per the question there is stock split of 2-3. Thus after the stock split the no. of shares will increase and for every 2 shares 3 shares will be alloted.
(I) Total dollar value of Amy’s investment in Tip Top BEFORE the split:
No. of Shares held before the split * Current Price per Share
=	145*63
=	$9,135.00
(II)Total shares outstanding that Tip Top will have AFTER the split:
No. of Shares held before the split * Share Spit ratio
=	145*3/2 Shares
=	217.5 Shares
(III)Share Price after the split is as follows:
No. of shares before the Split* Current share Price/ No. of Shares after the Split
=	5000*63/(5000*3/2)
=	42.00
2) Using CAPM
ke= Rf+Beta(Rm-Rf)
9=3+0.95(Rm-3)
Thus Rm= 9.32%
Where,
Rm= Market Return
Beta is given as 0.95
Ke= Expected return given as 9%
Rf= Risk free return given as 3%