Which one of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split?
A) Investors will triple their wealth after the split.
B) Investors' wealth will fall by two-thirds after the split.
C) Percentage of ownership increases for the investors.
D)Earnings per share will fall by two-thirds after the split.

Question

Quizplus · Accepted Answer

A three-for-one stock split means that for each share an investor owns, they will now have three. However, the total value of their investment does not change just because of the split. The market adjusts the price per share to reflect the split, so while investors will have more shares, the price per share will decrease accordingly, leaving their total investment value unchanged. Therefore, statements about wealth tripling or falling by two-thirds are incorrect, as is the statement about percentage of ownership increasing. The correct statement is that earnings per share will fall by two-thirds, as the earnings are now divided among three times as many shares.

Which One of the Following Statements Is Correct About Investors