Question

Which of the following statements is true about a stock split?

a. A stock split discourages investors from investing in the stock and reduces the types and numbers of stockholders.

b. A stock split distributes shares of stock in the form of stock dividend to stockholders.

c. The major objective of a stock split is to reduce the market price per share of the stock.

d. A stock split applies only to unissued shares.

Answer 1

a) A stock split discourages investors from investing in the stock and reduces the types and numbers of stockholders.

False

After a split many new investors might like to buy the stock as it is available at a lower price hoping that they would stand to gain. While a split in theory should have no effect on a stock's price, it often results in renewed investor interest, which can have a positive impact on the stock price. If the company adopts 7 shares for every shared held, number of shares becomes 7 times compared to pre-split, ie, after share split the number of shares outstanding always increases.

b. A stock split distributes shares of stock in the form of stock dividend to stockholders

False

Stock dividend Vs Stock split

Stock dividend

A stock dividend is the issuance by a corporation of its common stock to shareholders without any consideration. For example, when a company declares a 15% stock dividend, this means that every shareholder receives an additional 15 shares for every 100 shares he already owns. A company usually issues a stock dividend when it does not have the cash available to issue a normal cash dividend, but still wants to give the appearance of having issued a payment to investors.

Stock Split

A stock split occurs when a company feels its stock is above the popular price range for their stock. The company uses the split to bring the stock price into the desired range. A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. Although the number of shares outstanding increases by a specific multiple, the total value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.

c. The major objective of a stock split is to reduce the market price per share of the stock.

True

Stock Split

A stock split occurs when a company feels its stock is above the popular price range for their stock. The company uses the split to bring the stock price into the desired range.

d. A stock split applies only to unissued shares

False

A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. Although the number of shares outstanding increases by a specific multiple, the total value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.