Assume that you write a column for a very widely followed financial blog titled “Finance Questions: Ask the Expert.” Your job is to field readers’ questions that deal with finance. This week you are going to address a question from your readers that have to do with dividends.
Question: I own 8 percent of the Standlee Corporation’s 30,000 shares of common stock, which most recently traded for a price of $98 per share. The company has since declared its plans to engage in a 2-for-1 stock split.
What will my financial position be after the stock split, compared to my current position? (Hint: Assume the stock price falls proportionately.)
The executive vice-president in charge of finance believes the price will not fall in proportion to the size of the split and will only fall 45 percent because she thinks the pre-split price is above the optimal price range. If she is correct, what will be my net gain from the split?