Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Stock Splits

Financial Accounting

12. Stockholders' Equity

Stock Splits

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Multiple Choice

Which of the following best describes the effect of a stock split on the overall value of a company?

A stock split eliminates all outstanding shares.

A stock split increases the overall value of a company.

A stock split does not change the overall value of a company.

A stock split decreases the overall value of a company.

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Verified step by step guidance

Understand the concept of a stock split: A stock split is a corporate action where a company divides its existing shares into multiple shares to boost the liquidity of the stock. For example, in a 2-for-1 stock split, each shareholder receives an additional share for every share they own, effectively doubling the number of shares while halving the price per share.

Recognize that a stock split does not affect the company's overall market capitalization: The market capitalization is calculated as the total number of shares multiplied by the price per share. Since the increase in the number of shares is offset by the proportional decrease in the price per share, the overall value remains unchanged.

Clarify that a stock split does not eliminate outstanding shares: Instead, it increases the number of shares outstanding while maintaining the same total equity value.

Understand that a stock split does not increase or decrease the overall value of the company: The intrinsic value of the company remains the same, as the split is purely a mechanical adjustment to the number of shares and their price.

Conclude that the correct answer is: 'A stock split does not change the overall value of a company,' as the split is designed to make shares more affordable and accessible without altering the company's financial position.