Question

Stock split and its effects [LO18-4] Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $55 to $80 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 20,000,000 Retained earnings 45,000,000 Net worth $ 105,000,000 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 $17 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 18.82 stays the same.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

Answer 1

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").)

Shares would be outstanding after a two-for-one stock split = 2 x shares outstanding before stock split = 2 x 2 mn = 4 mn

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

Par value = Par value prior to stock split / stock split ration = 10 / 2 = $ 5 per share.

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").)

Shares would be outstanding after a three-for-one stock split = 3 x shares outstanding before stock split = 3 x 2 mn = 6 mn

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

Par value = $ 10 / 3 = $ 3.33

c. Assume that Wilson earned $17 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 18.82 stays the same.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

Net income, NI = $ 17 mn

EPS before the two-for-one stock split = NI / number of shares outstanding = 17 / 4 = $ 4.25

EPS after the two-for-one stock split = NI / number of shares outstanding = 17 / (2 x 4) = $ 2.125

The price per share after the two-for-one stock split?

Price = Price prior to stock split / Stock split ratio = 80 / 2 = $ 40 / share

After the three-for-one stock split?

Price = 80 / 3 = $ 26.67 / share