Do stock splits create value? Consider the analogy of having a lump of gold (set volume,...

Do stock splits create value? Consider the analogy of having a lump of gold (set volume, the form has no value, such as a minted, limited edition coin may have). Would you consider going to your shop and sawing your lump of gold into 2 pieces (a “gold split”), so that you would be wealthier with 2 pieces of gold? What are some of the “transaction costs” of executing this “gold split”? Consider another analogy of going out to pizza with your friends. If on a particular night your group feels extra hungry, would it make sense to say to the pizza shop: “Hey, you know that pizza we usually order and you serve cut in 6 pieces? Would you split those pieces & cut it into 12 pieces tonight, since we are all extra hungry and want more “value”?

Expert Solution

Answer:-

Theoretically stock splits does not create value to the investors. Stock split does not change the fundamentals of the company and moreover there is no change in the earnings and equity base capital.

The stock split makes the stock cheaper. For example suppose the stock is valued at $ 1000, and the company announces 5:1 split ratio. The company stock will trade at $ 200 post the split. But the stock post the split valued at $ 200 becomes more attractive to the small investors and the trading activity increases in the stock.

The stock split in a way signals that the company wants more investor participation. Continuing with the example that the company's stock is $ 1000 and has 1 million shares outstanding. The company stock post split of 5:1 has a price of $ 200 and has 5 million shares outstanding but the total equity base capital remains at $ 1000 million and does not change. So with more number of shares available at lower price may increase the small investor participation. The increase in value of stock price completely depends on the fundamentals such as earnings and has nothing to do with stock splits.

jeff jeffy answered 8 months ago

What is the value of rights in a rights issue? Explain stock splits, stock dividends, equity...

What is the value of rights in a rights issue? Explain stock splits, stock dividends, equity dilution = issue-related terminology

Why do most companies report stock splits in the same way as a large stock dividend?

What do stock splits often increase? Select one: a. The price of shares b. The number...

What do stock splits often increase? Select one: a. The price of shares b. The number of shares c. The cost of shares d. The value of shares Question 7 Not yet answered Marked out of 1.00 Flag question Question text Dividends are typically taxed at which level? Select one: a. Investor level b. Company level c. No level d. Both A and B Question 8 Not yet answered Marked out of 1.00 Flag question Question text Which of the...

Set up the calculation to arrive at the market value of a new bond having a...

Set up the calculation to arrive at the market value of a new bond having a face amount of $1,000, the annual interest rate of 7% payable semiannually, callable at the end of five years (call price of 106) and 25 years remaining maturity at a 6% yield to call. (Do not use a calculator. Show the appropriate equation and data substitution.) At this yield will the bond trade at par, a discount or a premium?

Set up (Do Not Evaluate) a triple integral that yields the volume of the solid that...

Set up (Do Not Evaluate) a triple integral that yields the volume of the solid that is below the sphere x^2+y^2+z^2=8 and above the cone z^2=1/3(x^2+y^2) Rectangular coordinates b) Cylindrical coordinates c) Spherical coordinates

1-) Set up (but DO NOT COMPUTE) an integral for the volume of the solid obtained...

1-) Set up (but DO NOT COMPUTE) an integral for the volume of the solid obtained by rotating the region bounded by the graphs of y = 0, y = √ x − 2, and x = 4 around the y-axis. 2-) Find the area enclosed by one petal of the four-leaved rose curve r(θ) = sin(2θ).

Now consider the set of portfolios that can be obtained by combining the stock and the...

Now consider the set of portfolios that can be obtained by combining the stock and the bond. Please show your detailed calculations or provide arguments to support your answers Allocation to Stock Allocation to Bond Portfolio Mean Portfolio Std Dev 0% 100% 10.0% 10.00% 25% 75% 11.25% 10.55% 50% 50% 12.50% 12.85% 75% 25% 13.75% 16.17% 100% 0% 15.0% 20.00% a. What percentage of your wealth is allocated in the stock and bond at the minimum variance portfolio? b. What...

Marigold Corp. issued 10100 shares of its $5 par value common stock having a fair value...

Marigold Corp. issued 10100 shares of its $5 par value common stock having a fair value of $20 per share and 14700 shares of its $15 par value preferred stock having a fair value of $30 per share for a lump sum of $518000. How much of the proceeds would be allocated to the common stock? $162731 $355269 $202000 $228250

Having the following data:- A $100.0 par value preferred stock with 10.0% dividend & a 15.0%...

Having the following data:- A $100.0 par value preferred stock with 10.0% dividend & a 15.0% required return. A $1.0 par value common stock with $3.0 EPS; a 5.0% risk-free rate; a 6.0% Market Risk-Premium; a 40.0% pay-out ratio; a 5.0% constant growth in EPS & dividend per share (g); Beta is 1.40. A 20 years 6.0% coupon debenture (Non-guaranteed corporate bond) with a Yield-to-maturity (YTM) of 5.0%. Answer the following questions:- 1 - The preferred stock's price is ???...

Is a company's stock value related to its trading volume? Are investors likely to react strongly...

Is a company's stock value related to its trading volume? Are investors likely to react strongly to fluctuations in the stock price by buying or selling a stock at a high rate? What are the implications of this for the stability of a stock value during volatile period in the U.S. economy?

Question