Questions: West Wind, Inc. has 5,000,000 shares of common stock outstanding with a market value of 60 per share. Net income for the coming year is expected to be 6,900,000. What impact will a three-for-one stock split have on the earnings per share and on the price of the stock?

Solution Steps

To determine the impact of a three-for-one stock split on the earnings per share (EPS) and the price of the stock, we need to follow these steps:

1. Calculate the current EPS by dividing the net income by the number of shares outstanding.
2. After the stock split, the number of shares will triple, so calculate the new number of shares.
3. Calculate the new EPS using the new number of shares.
4. The stock price will be divided by three due to the stock split, so calculate the new stock price.

The current EPS is calculated using the formula:

\[ \text{EPS} = \frac{\text{Net Income}}{\text{Shares Outstanding}} = \frac{6900000}{5000000} = 1.38 \]

After a three-for-one stock split, the new number of shares outstanding is:

\[ \text{New Shares Outstanding} = 3 \times \text{Shares Outstanding} = 3 \times 5000000 = 15000000 \]

The new EPS after the stock split is calculated as follows:

\[ \text{New EPS} = \frac{\text{Net Income}}{\text{New Shares Outstanding}} = \frac{6900000}{15000000} = 0.46 \]

The new market value per share after the stock split is:

\[ \text{New Market Value Per Share} = \frac{\text{Market Value Per Share}}{3} = \frac{60}{3} = 20.0 \]

Final Answer