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CMA Intermediate · Financial Management and Business Data Analytics · Dividend Decisions and Dividend Theories

Anand Engineering Ltd has 5,00,000 equity shares of Rs 10 each, with a market price of Rs 120 per share before a stock split. It announces a 1-for-5 stock split, so each Rs 10 share becomes five shares of Rs 2 each. Ignoring market imperfections, what is the theoretical market price per share and the number of shares after the split?

The theoretical price is Rs 24 with 25,00,000 shares. A split multiplies the share count by five without changing the company's total market value of Rs 6 crore, so the price per share falls to one-fifth of Rs 120, which is Rs 24.

  1. ARs 24; 25,00,000 sharesCorrect
  2. BRs 120; 25,00,000 shares
  3. CRs 24; 5,00,000 shares
  4. DRs 600; 1,00,000 shares

Explanation

Shares after split = 5,00,000 x 5 = 25,00,000. Market capitalisation stays at 5,00,000 x 120 = Rs 6,00,00,000, so price = 6,00,00,000 / 25,00,000 = Rs 24. Keeping the price at Rs 120 wrongly raises market value fivefold.

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