Miya, a single investor owns 1000 shares of Advance C-Synergy (ACS), common stock. She originally bought the stock two years ago at initial public offering (IPO) price at RM5 per share. The stock of this fast growing technology company is currently trading for RM21 per share, so the current value of her advance ACS stock is RM21,000 (RM21 x 1000). Because the firm’s board of director believe that the stock would trade more actively in the RM 7 to RM8 price range, it just announced a 3-for-1 stock split.

Question

Miya, a single investor owns 1000 shares of Advance C-Synergy (ACS), common stock. She originally bought the stock two years ago at initial public offering (IPO) price at RM5 per share. The stock of this fast growing technology company is currently trading for RM21 per share, so the current value of her advance ACS stock is RM21,000 (RM21 x 1000). Because the firm’s board of director believe that the stock would trade more actively in the RM 7 to RM8 price range, it just announced a 3-for-1 stock split.

Questions:
a) Compare the total value of Miya’s stock holding before and after the stock split.
b) If the analyst believe that the price will fall 25% from the initial price after the split, does Miya experience any gain or loss on the stock?

Answer 1

a) Before the stock split, Miya owns 1000 shares of Advance C-Synergy (ACS) common stock, with each share valued at RM21. So, the total value of her stock holding before the split is RM21,000 (RM21 x 1000).

After the 3-for-1 stock split, the number of shares she owns will be tripled. Therefore, she will have 3000 shares (1000 shares x 3) of ACS stock.

To find the new value of her stock holding after the split, we need to divide the current value by the stock split ratio. In this case, since it is a 3-for-1 split, we divide the total value by 3.

So, the new total value of Miya's stock holding after the split is RM7,000 (RM21,000 / 3).

b) If the analyst believes that the price will fall 25% from the initial price after the split, we can calculate the new price per share after the split.

Since the initial price after the split is RM7 (as mentioned in the question), we need to calculate the 25% decrease from this price.

25% of RM7 is RM1.75 (RM7 x 0.25).

Therefore, the new price per share after the split would be RM5.25 (RM7 - RM1.75).

Now, to determine if Miya experiences any gain or loss on the stock, we need to compare the new price per share after the split (RM5.25) to the original purchase price per share (RM5).

Since the new price per share (RM5.25) is higher than the original purchase price per share (RM5), Miya would experience a gain on the stock if the price falls 25% after the split.