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Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

An investor holds 400400 shares of ABC Corporation common stock currently trading at $60\$60 per share. The company declares and executes a 55-for-44 forward stock split. What is the investor's expected post-split price per share, in dollars?

Answer: 48 $

Answer

The expected post-split price per share is $48.
In a 55-for-44 forward stock split, the investor receives 55 shares for every 44 shares previously held, increasing the share position from 400400 to 500500 shares (400×1.25=500400 \times 1.25 = 500). Because the total value of the investor's position remains unchanged at $24,000\$24,000 (400 shares×$60400 \text{ shares} \times \$60), the post-split price per share must decrease proportionally to $48\$48 (500 shares×$48=$24,000500 \text{ shares} \times \$48 = \$24,000).

Step-by-Step Solution

1
Determine the stock split ratio
The split factor is 54=1.25\frac{5}{4} = 1.25.
A 5-for-4 forward stock split increases the total number of shares by a factor of 1.25.
2
Calculate the post-split price per share
$601.25=$48\frac{\$60}{1.25} = \$48
A stock split does not alter the total dollar value of the holding, so the price per share decreases proportionally as the share count increases.

Key Concept

Forward Stock Split Price Adjustment
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions