Question

A put option on 100 shares of Generous Dynamics stock has an exercise price $115.0 per share. GD declares 4.0-for-1 stock split. What happens to the exercise price and the number of shares underlying the option

Answer 1

Answer: number of shares increases to 400 and the exercise price is reduced to $28.75

Step-by-step explanation:

4 for 1 stock split means 1 stock will be splitted into 4 equal stock. In this case, the 100 shares will become:

= 100 × 4

= 400 shares.

Then, the exercise price will be calculated as:

Exercise price:

$115 x 100 shares = new exercise price x 400 shares

$11500 = new exercise price x 400 shares

Exercise price = $11500/400

Exercise price = $28.75

Therefore, the number of shares increases to 400 and the exercise price is reduced to $28.75