Wilson Pharmaceuticals stock has done very well in the marke

Wilson Pharmaceuticals\' stock has done very well in the market during the last three years. It has risen from $25 to $50 per share. The firm\'s current statement of stockholders\' equity is as follows:

Common stock (4 million shares issued at par value of $10 per share) $40,000,000

Paid-in capital in excess of par 12,000,000

Retained earnings 48,000,000

Net worth $ 100,000,000 a-

1. How many shares would be outstanding after a two-for-one stock split?

Number of shares ____________

a-2. What would be its par value?

b-1. How many shares would be outstanding after a three-for-one stock split?

b-2 What would be its par value?

c. Assume that Wilson earned $18 million. What would its earnings per share be before and after the two-for-one stock split? After the three-for-one stock split?

EPS before ___________

EPS after 2-for 1- split ___________

EPS after 3-for1 split ___________

d. What would be the price per share after the two-for-one stock split? After the three-for-one stock split? (Assume that the price-earnings ratio of 11.11 stays the same.)

EPS after 2-for 1- split ___________

EPS after 3-for1 split ___________

Solution

1. number of shares = 4,000,000*2 = 8,000,000

a-2. par value per share = 5

b-1 number of shares = 4,000,000 * 3 = 12,000,000

b-2 = par value = 10/3 = 3.33

c. EPS before split = 18/4 = 4.5

EPS after 2 for 1 split = 18/8 = 2.25

EPS after 3 for 1 split = 18/12 = 1.5

d. price after 2 for 1 split = 50/2 = 25

price after 3 for 1 split = 50/3 = 16.67