Question

Why is stock split a dilution of EPS? Why is a reverse stock split a reverse dilution of EPS? What are the impacts of stock repurchase on stockholder's wealth?

Answer 1

Stock split refers to a decision in which the number of shares issued by a company is further divided into more shares. As the number of shares after stock split increases with the earning remaining constant, it leads to the dilution of the eps.

In case of reverse stock split , the shares of the company merge together to form smaller number of shares with more value. This decreases the number of shares of the company, which eventually leads to reverse dilution of the eps.

A stockholders wealth increases, if there is a stock repurchase by the company. A stock repurchase leads to increase in the value of the shares held by the company , which eventually leads to increase in the value of the investment made by the company. This increase in the value of investment, increases the wealth of the shareholders.