Questions and Answers
To make the stock price attractive to a wider base of investors, what can the company declare?
A stock split.
What is a forward split?
A forward split increases the number of shares and reduces the price without affecting the total market value.
More shares is less value but the same total ownership interest before and after a stock split.
True
In a stock split where x is greater than y, is the split forward or reverse for x:y?
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In a stock split where x is less than y, is the split forward or reverse for x:y?
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What are the steps to calculating a stock split?
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A reverse split has the opposite effect on the number and prices of shares, resulting in investors owning more shares worth less per share.
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Which of the following statements regarding a 2-for-1 stock split are TRUE? (Select all that apply)
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If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares?
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If ABC Corp. declares a 5-4 stock split, an investor who owns 300 shares would receive how many additional shares?
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A 2-for-1 stock split does which of the following? (Select all that apply)
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If Flying Horse Corp. splits 5:4, what would be the adjusted presplit $0.40 par value of the common stock?
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A company has reverse-split its common stock. The effect on the earnings per share will be?
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Study Notes
Stock Splits Overview
- Declaring a stock split makes shares more attractive to retail investors by lowering the price per share while maintaining total market value.
- A forward split increases the number of shares and reduces the share price without changing the total market value of the company.
Forward and Reverse Splits
- A forward split (x:y) occurs when x > y, increasing shares and decreasing individual share value.
- A reverse split (x:y) occurs when x < y, decreasing shares and increasing individual share value.
Calculation Steps for Stock Splits
- Determine total stock value by multiplying the number of shares by the price per share.
- For an x:y split, calculate new shares by multiplying the current shares by x and dividing by y.
- Determine new price per share by dividing total value by the new number of shares.
True or False Statements
- More shares result in less value per share, keeping total ownership interest unchanged before and after a split (TRUE).
- In a reverse split, investors own fewer shares worth more each (FALSE - they own FEWER shares worth MORE).
Effects of a 2-for-1 Stock Split
- The share price is halved, the number of shares doubles, and the total market value remains unchanged.
- Statements I (share price reduction) and IV (doubling shares) are true regarding a 2-for-1 split.
Examples of Stock Splits
- In a 3-for-2 stock split, an investor with 200 shares will receive 100 additional shares, totaling 300 shares.
- A 5-for-4 stock split results in an investor with 300 shares receiving 75 additional shares (25% increase).
Adjustments in Par Value
- A 2-for-1 split increases outstanding shares and reduces par value per share by half while not affecting retained earnings.
- In a 5:4 stock split, the $.40 par value per share is adjusted to $.32, calculated by multiplying the original par by the inverse of the split (4/5).
Earnings Per Share Impact
- Following a reverse split, earnings per share (EPS) will increase, as fewer shares are divided into the same total earnings, resulting in a higher EPS.
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Description
Test your knowledge on stock splits with these flashcards. Learn about the purpose of stock splits and the concept of forward splits as you explore important definitions in the world of finance. Perfect for students and anyone interested in investing!
