Accounting: Effect of Stock Split!!! Here is a problem I couldn't quite get?

Question

Rolling Pin Corporation had 50,000 shares of common stock outstanding, declared a 3-for-1 stock split (2 additional shares for each share issued).

a. What will be the number of shares outstanding after the split?

b. If the common stock had a market price of $180 per share before the stock split, what would be an approximate market price per share after the split?

Answer 1

a. What will be the number of shares outstanding after the split?
A 3-1 stock split would triple the no. of outstanding shares, so after the split, the no. of shares outstanding would be 150,000.

b. If the common stock had a market price of $180 per share before the stock split, what would be an approximate market price per share after the split?
It would be one third of $180, i.e. $60 per share.

A stock that is subject to a 3-1 split should see its shares initially cut in third. But, holders of the stock will not be disappointed by this share price drop since they will each be receiving proportionately more shares; it is very important to understand that existing shareholders are getting the newly issued shares for no additional investment. The benefit to the shareholders comes about, in theory, because the split creates more attractive opportunities for other future investors to ultimately buy into the larger pool of lower priced shares. Rapidly growing companies often have share splits to keep the per share price from reaching stratospheric levels that could deter some investors. In the final analysis, you should understand that a stock split is mostly cosmetic as it does not change the underlying economics of the firm.

Here's an excellent site for this topic.

Answer 2

Stock splits are dilutive in that the number of shares outstanding are bumped up but the equity component stays the same. So if you are a shareholder who owns one share of stock at $10 a share and the company issued a 2:1 split, your shares would be worth 3.33 since you have 3 shares now.

I hope that helped.

Answer 3

a) 150,000
b) $60 / share

This is true because a stock split has a net zero economic effect. In other words, 50,000 shares x $180/ share = $9,000,000.
You get the same result with 150,000 shares x $60 /share.