Question

Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $45 to $70 per share. The firm’s current statement of stockholders’ equity is as follows:

Common stock (4 million shares issued at par value of $10 per share)	$	40,000,000
Paid-in capital in excess of par		15,000,000
Retained earnings		45,000,000
Net worth	$	100,000,000

a-1. How many shares would be outstanding after a two-for-one stock split? (Do not round intermediate calculations. Input your answer in millions (e.g., $1.23 million should be entered as "1.23").)

a-2. What would be its par value? (Do not round intermediate calculations and round your answer to 2 decimal places.)

b-1. How many shares would be outstanding after a three-for-one stock split? (Do not round intermediate calculations. Input your answer in millions (e.g., $1.23 million should be entered as "1.23").)

b-2 What would be its par value? (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. Assume that Wilson earned $14 million. What would its earnings per share be before and after the two-for-one stock split? After the three-for-one stock split? (Do not round intermediate calculations and round your answers to 2 decimal places.)

d. What would be the price per share after the two-for-one stock split? After the three-for-one stock split? (Assume that the price-earnings ratio of 20.00 stays the same.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

Answer 1

a-1]

Shares outstanding after split = shares outstanding before split * split ratio

Shares outstanding after split = 4 million * 2 = 8 million

a-2]

par value after split = par value before split / split ratio

par value after split = $10 / 2 = $5.00

b-1]

Shares outstanding after split = shares outstanding before split * split ratio

Shares outstanding after split = 4 million * 3 = 12 million

b-2]

par value after split = par value before split / split ratio

par value after split = $10 / 3 = $3.33

c]

two-for-one stock split

EPS before split = earnings / shares outstanding before split

EPS before split = $14 million / 4 million = $3.50

EPS after split = earnings / shares outstanding after split

EPS after split = $14 million / 8 million = $1.75

three-for-one stock split

EPS before split = earnings / shares outstanding before split

EPS before split = $14 million / 4 million = $3.50

EPS after split = earnings / shares outstanding after split

EPS after split = $14 million / 12 million = $1.17

d]

two-for-one stock split

price per share = EPS * PE ratio

price per share = $1.75 * 20.00 = $35.00

three-for-one stock split

price per share = EPS * PE ratio

price per share = $1.17 * 20.00 = $23.33