Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $55 to $80 per share. The firm’s current statement of stockholders’ equity is as follows:
Common stock (5 million shares issued
at a par value of $10 per share) ......... $ 50,000,000
Paid-in capital in excess of par .......... 13,000,000
Retained earnings ............... 57,000,000
Net worth .................. $120,000,000
a. How many shares would be outstanding after a two-for-one stock split? What would be its par value?
b. How many shares would be outstanding after a three-for-one stock split? What would be its par value?
c. Assume that Wilson earned $11 million. What would its earnings per share be before and after the two-for-one stock split? After the three-for-one stock split?
d. What would be the price per share after the two-for-one stock splits? After the three-for-one stock split? (Assume that the price-earnings ratio of 36.36 stays the same.)
e. Should a stock split change the price-earnings ratio for Wilson?