How to Calculate a 3-for-1 Stock Split
Stock splits are a common mechanism for company management to signal the improving prospects of a growing concern. While there is not any change in the book value of the company, the effect of a stock split can signal the beginning of a rise in the stock price due to increased favorable prospects.
- 1 -Understand that stock splits do not give greater ownership in a company. Stock splits simply give you more shares of a stock while the value per share declines proportionately. Stock splits do create some tax advantages when stock is sold. Consult an accountant for professional advice.
- 2 –Calculate a 3-for-1 stock split by knowing the number of shares you own prior to the effective date of the split. A stock split is merely a ratio: 3-for-1 means you now own three shares for every share previously owned. If you owned 1000 shares pre-split, you would now own 3000 shares post-split. The market value of your investment remains the same, however.
- 3 -Calculate the new, adjusted earnings per share, cash flow per share, and other per share calculations by multiplying the pre-split amounts by 1/3. Know that at the time of a split announcement companies usually make pre- and post- balance sheets available.
- 4 -Do not confuse a 3-for-1 stock split for a 1-for-3 split. This is also referred to as a reverse stock split. In a reverse stock split the value per share rises 3-fold and the outstanding number of shares declines by 2/3s. This technique is used for companies whose share price has dropped below margin.
- 5 -Use the above technique for any ratio of stock split. Remember that the assets, liabilities and net worth stay the same. Only proportionate, per share amounts, change.