Question

XYZ has 400,000 shares of common stock outstanding, a P/E ratio of 8, and $500,000 in net income. The board of directors has just voted in favor of a 3-for-2 stock split. You owned 100 shares before the stock split. What will be the total value of your investment after the split? Group of answer choices

Answer 1

Answer:

$1,000

Explanation:

If total earnings are $500,000 and there are 400,000 shares, the original price per share is determined by:

$P=\frac{P}{E}*E\\ P=8*\frac{\ 500,000}{400,000} \\P=\ 10$

The value of your invest will be same before and after the split, what will change is the number of shares and their individual price.

If you owned 100 shares at $10 each, the value of your investment is:

$I = \ 10*100\\I=\ 1,000$

Total value of your investment will be $1,000.