NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
A client holds 100 shares of XYZ Corp. common stock, which recently declared a 2-for-1 stock split. Before the split, the stock was trading at $80 per share. Immediately after the split, what would be the client's position in XYZ Corp.?
- A50 shares at $160 per share.
- B200 shares at $40 per share.
- C200 shares at $80 per share.
- D100 shares at $40 per share.
Show answer & explanationAnswer & explanation
Correct answer: B. 200 shares at $40 per share.
In a 2-for-1 stock split, the number of shares doubles, and the price per share is halved. So, 100 shares become 200 shares, and $80 per share becomes $40 per share. The total value of the investment remains the same ($100 * $80 = $8,000; $200 * $40 = $8,000).
Why the other options are wrong
- A. This describes a reverse stock split (1-for-2) and an incorrect price adjustment.
- C. Incorrect price per share. The price is halved, not maintained.
- D. Incorrect number of shares. The shares double in a 2-for-1 split.
Stock Split
An action by a company that increases the number of its outstanding shares by dividing each share into multiple shares. The price per share is proportionally reduced, but the total market value of an investor's holdings remains unchanged.
- Common splits are 2-for-1, 3-for-1, or 3-for-2.
- Increases liquidity and makes shares more attractive to small investors.
- A reverse stock split reduces the number of shares and increases price per share.
Memory trick: Splits are like cutting a pie: more slices, smaller size, same pie.