Which of the following statements is false? Multiple Choice Both stock splits and stock dividends increase...

Which of the following statements is false?

Multiple Choice

Both stock splits and stock dividends increase the number of common shares issued.
Both stock splits and stock dividends have the impact of reducing the market price of the stock.
Stock splits reallocate amounts between retained earnings and contributed capital accounts.
Both stock splits and stock dividends increase the number of common shares outstanding.

Solutions

Expert Solution

Option C: Re-allocation between retained earnings & contributed capital accounts.

Explanation:

Stock split refers to the situation where the company issues more shares to the existing shareholders (by breaking such shares). It is also commonly known as stock-divide.

Stock dividend refers to dividend paid to shareholders in form of shares.

Stock splits and stock dividends both increase the number of shares as the company allots shares to the existing shareholders in both the cases and share capital therefore is increased.

So, Statement A and D are absolutely correct.

Now,

Stock splits and stock dividends reduce the market price of the shares as the number of shares increase. But the stock splits do not reallocate the amounts between retained earnings and capital as the retained earnings are not affected by stock splits.

Hence, option 'C' would be the incorrect statement here, and the correct answer.

In case of any doubt, please feel free to comment.

ekkarill92 answered 1 year ago

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