Question

You currently own 100 shares of stock in Beverly Brothers Inc. The stock currently trades at $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes your position after the proposed stock split takes place?

1) You will have 300 shares of stock, and the stock will trade at or near $120 a share.
2) You will have 300 shares of stock, and the stock will trade at or near $40 a share.
3) You will have 100 shares of stock, and the stock will trade at or near $40 a share.
4) You will have 50 shares of stock, and the stock will trade at or near $120 a share.
5) You will have 50 shares of stock, and the stock will trade at or near $40 a share.

Answer 1

No option is correct, since you will have 200 shares and each share should be worth around $60.

Step-by-step explanation:

If the 2-for-1 stock split takes place then you will have 200 shares instead of 100. For every 1 share that you currently own, the corporation will issue another share.

Since the price of the shares was $120 before the stock split, after the stock split the price will be divided by two (the same proportion). So each new share will cost approximately $60.

In order for option 2 to be correct, the stock spit should have been 3-for-1.