1.2.4 - STOCK SPLITS

What is a forward split?

- A forward split increase the number of shares and reduces the price without affecting the total market value of shares outstanding. - An investor will receive more shares, but the value of each share is reduced. - The total market value of the ownership interest is the same before and after the split.

What are the steps to calculating a stock split?

1. Multiply the # of shares by the $ of each share to determine the total value of the stocks. 2. For an x:y split, multiply x by the # of shares and divide by y for the new # of shares. New # of shares times z (new $ of each share) will equal the total value of the stocks 3. Divide total value by new # of shares to determine z.

If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares? A) 100 B) 300 C) 500 D) 400

A) 100 The investor will receive an additional 100 shares from a 3 for 2 stock split. To calculate the additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares × 3/2 = 300 shares). Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares. Reference: 1.2.4.1 in the License Exam Manual

If ABC Corp. declares a 5-4 stock split, an investor who owns 300 shares would receive how many additional shares? A) 75. B) 100. C) 30. D) 60.

A) 75. A 5-4 split represents a 25% increase in shares. For each 4 shares owned, the investor will receive 1 new share. 1/4 = 25% increase. 300 shares × 25% = 75 shares. Reference: 1.2.4.1 in the License Exam Manual

A company has reverse-split its common stock. The effect on the earnings per share will be: A) an increase. B) none of these.. C) a decrease. D) no effect.

A) an increase. When a reverse split takes place, the number of outstanding shares is reduced. Since the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share. Reference: 1.2.4.2 in the License Exam Manual

TRUE OR FALSE? A reverse split has the opposite effect on the number and prices of shares. After a reverse split, investors own more shares worth less per share.

FALSE After a reverse split, investors own FEWER shares worth MORE per share.

TRUE OR FALSE? More shares is less value but the same total ownership interest before and after.

TRUE

To make the stock price attractive to a wider base of investors - that is, retail vs. institutional investors - the company can declare what?

The company can declare a stock split.

Which of the following statements regarding a 2-for-1 stock split are TRUE? I. The share price is reduced by half. II. The total market value of the outstanding stock decreases. III. The total market value of the outstanding stock may increase or decrease as a result of the split. IV. The number of shares doubles. A) I and III. B) II and III. C) I and IV. D) II and IV.

C) I and IV. In a 2-for-1 stock split, the number of outstanding shares is doubled and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same. Reference: 1.2.4.1 in the License Exam Manual

The board of directors of DMF, Inc., announces a 5:4 stock split. The market price of DMF after the split should decrease in value by A) 0.3. B) 0.2. C) 0.1. D) 0.25.

B) 0.2. The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5:4 stock split, the new price should be about 4/5 the old price. A 1/5-change equals 20% (100% / 5 = 20%). Reference: 1.2.4.1 in the License Exam Manual

If Flying Horse Corp. splits 5:4, the presplit $.40 par value of the common stock would now be adjusted to: A) 0.48. B) 0.32. C) 0.3. D) 0.4.

B) 0.32. Stock splits will change the par value of the stock. To calculate the new value multiply the original par by the inverse of the split: 4/5 × $.40 = $.32. Reference: 1.2.4.1 in the License Exam Manual

A 2-1 split does which of the following? I. Increases the number of outstanding shares II. Decreases the number of outstanding shares III. Decreases par value per share IV. Decreases retained earnings A) II and IV B) I and III C) I and IV D) II and III

B) I and III After a 2-1 stock split, the number of outstanding shares doubles and the par value per share decreases by half. Retained earnings are not affected. Reference: 1.2.4.1 in the License Exam Manual

In a stock split where x is greater than y, is the split forward or reverse for x:y?

The x:y split is a forward split.

In a stock split where x is less than y, is the split forward or reverse for x:y?

The x:y split is a reverse split.