Rule #1 Reminder: How do stock splits work?
Originally published 6/23/05 as a response to a Homework submitted by a reader.
Stock splits are the same as taking a dollar and splitting it into two fifty cent pieces. You still have a dollar of value but it's been broken into more easily traded currency. Stock is split so that it can be more easily bought in blocks of 100 shares by options traders, people doing covered calls and so on. It is just an accounting process, not a real change in price.
Shortly after the stock split you will see the entire charted history of the company change to reflect the new price per share relationship. That means that the stock chart which showed the price at $100 in June, will now show it at $50 in June. Everything else that is calculated on a per share basis like EPS will be recalculated to reflect the new number of shares. But the actual value of the business stayed the same.
So. All your calculations that were done on the old EPS of $6 will be redone to reflect the new EPS of $3. The old Sticker of $100 become $50. The old MOS of $50 becomes $25.
Make sense?
Phil
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