Question

How is stockholders equity affected in a stock split?

Answer 1

• See, basically what happens is a stock split is that 1 share is split into 2 or more shares.

This has TWO main effects:

#1: No. of shares outstanding increases [ by multiplying the split ratio]

#2: Par Value per share decreases[multiplying by reversing the split ratio]

• Lets understand that through an example.

Existing no. of outstanding shares = 10,000 shares of $ 10 par

And lets just say Retained earnings = $ 150,000

Stock Split ratio = 2 for 1, which means that each share is broken into 2 shares.

NOW

No. of shares after split = 10,000 shares x 2/1 = 20,000 shares

New par value = $ 10 par x ½ = $ 5 per share.

COMPARISON:

	Before Stock Split		After Stock Split
Common Stock	$              100,000	[10000 shares x $ 10 par]	$                 100,000	[20000 shares x $ 5 par]
Retained earnings	$              150,000		$                 150,000
Total Stockholder's Equity	$              250,000		$                 250,000

• As you can see, The ‘Total Stockholder’s Equity’ values stayed the same-before AND after Stock Split.
• Hence, Stock Split has NO IMPACT on Stockholder’s Equity so far as TOTAL value is concerned. Only changes that occur due to Stock Split ‘within’ Stockholder’s Equity are:

--Change in no. of shares, and

--Change in par value per share.