Ch 1: The stock Market

1. Ch 1: The stock Market 1.8 Stock Splits

2. Why do corporations stock split?? • When a stock splits, a corporation changes the number of outstanding shares while at the same time adjust the price per share so that the market cap remains unchanged • What are some reasons a stock might split? • How do you think the perception of change might lead to an increase in sales and market prices?

3. Why do corporations stock split?? • Outstanding shares - the total number of all shares issued by a corporation that are in investors’ hands • Market capitalization (market cap) – the total value of all of the company’s outstanding shares • market cap = number of shares x market price • A traditional stock split is when the value of a share and the number of shares are changed in such a proportional way that the value decreases as the number of shares • For example, 2 for 1 split. The investor gets 2 shares for every one share held while the price per share is cut in half

4. Why do corporations stock split?? • A reverse stock split is exactly the opposite. The number of outstanding shares is reduced and the market price per share is increased. • In a 1 for 2 split, the investor holding shares would now own one share for every two previously held (price goes up) • The investor perceives that the stock is worth more • This often happens to penny stocks, stocks whose value is less than $5 per share

5. Example 1 • On December 4, John Deere Corporation (DE) instituted a 2-for-1 stock split. Before the split, the market share price was $87.68 per share and the corporation had 1.2 billion shares outstanding. What was the presplit market cap for John Deere?

6. Example 2 • A corporation has a market capitalization of $24,000,000,000 with 250M outstanding shares. Calculate the price per share.

7. Example 3 • Look back at Example 1… • What was the post-split number of shares outstanding for John Deere? Post split and cross multiply Pre split

8. Example 4 • QualComm, Inc. instituted a 4-for-1 split in November. After the split, Elena owned 12,800 shares. How many shares had she owned before the split?

9. Example 5 • What was the post-split market price per share for John Deere in Example 1? How many shares are outstanding? Did the market cap change after the split?

10. Example 6 • In October, Johnson Controls, Inc instituted a 3-for-1 split. After the split, the price of one share was $39.24. What was the pre-split price per share?

11. Post split market price and number of outstanding shares • In general for any a for b split you can use the following formulas…

12. Example 7 • On October 15, Palm, Inc. instituted a 1-for-20 reverse stock split. Before the split, the market share price was $0.64 and there were 580,000,000 shares. What was the post-split share price and number of shares?

13. Example 8 • A major drugstore chain whose stocks are traded on the New York Stock Exchange was considering a 2-for-5 reverse split. If the pre-split market cap was 1.71B, what would the post-split market cap be?

14. Ch 1 asnmt 8 • Pg. 49 #2-7