Question

A corporation had 20,000 shares issued and outstanding of its $0.50 par value common stock.

At December 31, the stock was trading at a market price of $60 per share. The year end balance sheet reported common Stock of $10,000, Additional Paid-in Capital
of $20,000 and Retained Earnings of $50,000 prior to a 2-for-1 stock split.
Which of the following will not be a result of a 2-for-1 stock split?
Multiple Choice
The number of shares outstanding will double from 20,000 shares to 40,000 shares.
The par value will decrease by half from $0.50 to $0.25 per share.
Total stockholders' equity will increase by $10,000 (20,000 additional shares at $0.50 par value per share).
The market will respond with a reduction in the market price per share to around $30 per share (half of the value prior to the split)

Answer 1

The incorrect statement regarding a 2-for-1 stock split is that total stockholders' equity will increase by $10,000. Stock splits merely divide existing equity into a greater number of shares without altering the total equity amount.

Step-by-step explanation:

A 2-for-1 stock split impacts the corporation's shares in several ways, but it does not affect the total stockholders' equity. Let's analyze the potential outcomes:

• The number of shares standing will double from 20,000 shares to 40,000 shares.
• The par value per share will decrease by half from $0.50 to $0.25 per share post-split.
• The market price per share generally adjusts to around half, so it might move from $60 to around $30 per share.

However, the claim that total stockholders' equity will increase by $10,000 is incorrect because a stock split does not change the overall equity of the company. It merely divides the existing equity into a greater number of shares. Therefore, the statement that "Total stockholders' equity will increase by $10,000" is not a result of a 2-for-1 stock split.