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Difficulty: EasySettlement Dates, Trade Confirmations, and Corporate Actions

An investor holds 400400 shares of Meridian Health stock currently trading at $100\$100 per share. The board of directors declares a 55-for-44 forward stock split. What is the new adjusted price per share, in dollars, immediately following the split?

Answer: 80 $

Answer

The adjusted price per share following the 5-for-4 forward stock split is $80.
In a forward stock split, the investor receives more shares while the price per share decreases proportionally so that the overall dollar value of the position remains identical. For a 5-for-4 forward split, the new share price is calculated by multiplying the pre-split price of 100bytheinversefraction4/5,resultingin100 by the inverse fraction 4/5, resulting in 80 per share.

Step-by-Step Solution

1
Identify the pre-split share price and stock split ratio.
Pre-split price is $100\$100; split ratio is 55-for-44.
A forward stock split increases the total number of outstanding shares while reducing the price per share proportionally to preserve total market value.
2
Calculate the price adjustment factor.
The adjustment factor for price is 45=0.80\frac{4}{5} = 0.80.
The price per share adjusts inversely to the share quantity expansion ratio.
3
Multiply the original price per share by the adjustment factor.
$100×0.80=$80\$100 \times 0.80 = \$80.
Multiplying the pre-split price by 0.800.80 gives the exact post-split market price per share.

Key Concept

Forward Stock Split Price Adjustment
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions