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A shareholder’s return and stock split

Series X-A case study · set 1, case 4 of 9 · 5 questions · 1 mark each

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Question 1 of 5Case practice

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The case · stays here for all 5 questions

Farah buys 100 shares of a fictional company at ₹200 each. During the year she receives a cash dividend of ₹8 per original share. Immediately before a two-for-one stock split, the share price is ₹220. The split doubles the share count and, for this exercise, the price adjusts mechanically with no other market movement. Annual profit attributable to ordinary shareholders is ₹4 crore and there are 20 lakh shares before the split. Ignore taxes, charges and reinvestment of the dividend. Farah wants to calculate her total return and check whether the split itself creates additional wealth.

All people, firms, prices and contract terms are fictional.

Ignore taxes and transaction costs unless the case explicitly includes them.

Case 4 · Q1 of 51 markXA-S1-C04-Q1

What cash dividend does Farah receive?

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The case and its answers

Every question of this case, with its answer and why each other option is wrong.

Farah buys 100 shares of a fictional company at ₹200 each. During the year she receives a cash dividend of ₹8 per original share. Immediately before a two-for-one stock split, the share price is ₹220. The split doubles the share count and, for this exercise, the price adjusts mechanically with no other market movement. Annual profit attributable to ordinary shareholders is ₹4 crore and there are 20 lakh shares before the split. Ignore taxes, charges and reinvestment of the dividend. Farah wants to calculate her total return and check whether the split itself creates additional wealth.

All people, firms, prices and contract terms are fictional.

Ignore taxes and transaction costs unless the case explicitly includes them.

  1. Q1What cash dividend does Farah receive?

    • Option A. ₹8

      Why it is wrong: This is the dividend on one share.

    • Option B. ₹1,600

      Why it is wrong: The dividend was paid per original share before the split.

    • Option C. ₹800 — Correct answer

    • Option D. ₹2,000

      Why it is wrong: This is the capital gain before the split.

    Answer: C. 100 × ₹8 = ₹800. Remember: Cash dividends depend on eligible shares and the declared amount per share.

    Hint, shown before you answer in practice mode: Use the original 100 shares for this dividend.

    XA-S1-C04-Q1easynumerical

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  2. Q2What is her holding-period total return immediately before the split?

    • Option A. 18%

      Why it is wrong: This double-counts the dividend.

    • Option B. 10%

      Why it is wrong: This includes the price gain but excludes the dividend.

    • Option C. 4%

      Why it is wrong: This includes only the dividend yield.

    • Option D. 14% — Correct answer

    Answer: D. (₹220 − ₹200 + ₹8) ÷ ₹200 × 100 = 14%. Remember: Total return includes income as well as price movement.

    Hint, shown before you answer in practice mode: Add the price gain and dividend before dividing by the purchase price.

    XA-S1-C04-Q2mediumnumerical

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  3. Q3What shareholding and theoretical price result immediately after the split?

    • Option A. 200 shares at ₹110 each — Correct answer

    • Option B. 100 shares at ₹110 each

      Why it is wrong: This halves the price without increasing the shares.

    • Option C. 200 shares at ₹220 each

      Why it is wrong: This doubles wealth without an economic reason.

    • Option D. 50 shares at ₹440 each

      Why it is wrong: This describes a consolidation, not a two-for-one split.

    Answer: A. The share count doubles from 100 to 200 while the theoretical price halves from ₹220 to ₹110. The holding remains worth ₹22,000. Remember: A mechanical split changes the number of shares and price per share together.

    Hint, shown before you answer in practice mode: The split changes units, not the total value.

    XA-S1-C04-Q3mediumapplication

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  4. Q4What is earnings per share before the split?

    • Option A. ₹40

      Why it is wrong: This doubles rather than divides the earnings per share.

    • Option B. ₹10

      Why it is wrong: This is the post-split EPS if profit is unchanged.

    • Option C. ₹20 — Correct answer

    • Option D. ₹2

      Why it is wrong: This mixes crore and lakh units.

    Answer: C. ₹4,00,00,000 ÷ 20,00,000 shares = ₹20 per share. Remember: EPS uses profit attributable to ordinary shareholders and the relevant share count.

    Hint, shown before you answer in practice mode: Convert ₹4 crore and 20 lakh shares into consistent units.

    XA-S1-C04-Q4mediumnumerical

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  5. Q5Using the ₹220 pre-split price and the stated annual EPS, what is the P/E multiple?

    • Option A. 11 times — Correct answer

    • Option B. 0.091 times

      Why it is wrong: This reverses earnings and price.

    • Option C. 10 times

      Why it is wrong: This uses the purchase price instead of ₹220.

    • Option D. 22 times

      Why it is wrong: This mixes post-split EPS with the pre-split price.

    Answer: A. ₹220 ÷ ₹20 = 11 times. A consistent post-split calculation also gives ₹110 ÷ ₹10 = 11. Remember: Valuation ratios must use prices and per-share figures on the same basis.

    Hint, shown before you answer in practice mode: Divide the specified price by EPS from the same share basis.

    XA-S1-C04-Q5mediumnumerical

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A bond below face value

The next case in this set. Read its story first, then answer.

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Paper Trading Try it on the practice trading desk