New stock prices after stock split.

[balloon Man Mike]

A company (OriginalCo) decided to split off a piece of it's company to its own company (Newco). It gave the stock holders one share of Newco for every 5 shares on OriganalCo. Of course the stock holders go to keep their shares of OriginalCo. So, before the split they had 5 shares of OriginalCo. After the split they will have 5 shares of OriginalCo. and 1 share of NewCo.
So my question is, what should be the value of OriginalCo and NewCo after the split. Lets say the price of OriginalCo is $100 before the split. What is the new prices of OriginalCo and NewCo after the split?
I came up with what I think is the right values but I don't know why my formula works. Maybe you can explain the right way to do it.

Thanks for your help. Let me know if you have any questions
-- Mike

 

[BigBeachBanana]

Please share what you've done, and we can discuss

 

[Deleted member 4993]

A company (OriginalCo) decided to split off a piece of it's company to its own company (Newco). It gave the stock holders one share of Newco for every 5 shares on OriganalCo. Of course the stock holders go to keep their shares of OriginalCo. So, before the split they had 5 shares of OriginalCo. After the split they will have 5 shares of OriginalCo. and 1 share of NewCo.
So my question is, what should be the value of OriginalCo and NewCo after the split. Lets say the price of OriginalCo is $100 before the split. What is the new prices of OriginalCo and NewCo after the split?
I came up with what I think is the right values but I don't know why my formula works. Maybe you can explain the right way to do it.

Thanks for your help. Let me know if you have any questions
-- Mike

You came up with some values - please share those with us including your work to get the values.

 

[balloon Man Mike]

Are you saying the share price of OriginalCo and NewCo are both $83.33? This is not correct. The much smaller company can't have the same price as the larger company.

Basically OriginalCo*5 = $500 and then New-OriginalCo*5 + NewCo*1 = $500,.

What I did was divide by 25. This give $4, then multiply by 5 to get $20. So the new-OriginalCo is $96 and the NewCo is $20.
$96*5 + $20 =$500.

I have no idea why I need to divide by 25.

 

[BigBeachBanana]

Are you saying the share price of OriginalCo and NewCo are both $83.33? This is not correct. The much smaller company can't have the same price as the larger company.

Basically OriginalCo*5 = $500 and then New-OriginalCo*5 + NewCo*1 = $500,.

What I did was divide by 25. This give $4, then multiply by 5 to get $20. So the new-OriginalCo is $96 and the NewCo is $20.
$96*5 + $20 =$500.

I have no idea why I need to divide by 25.

You're solving a system of equations below
5x+y=500
y<x<100


There any many solutions to this, namely [imath]\frac{250}{3}[/imath]<x<100 and y=500-5x. Your answer (96,20) is just one of many solutions. For example, I can pick (95,25) or (90,50); then I would still have 500.