Question

When a company splits its common stock 3 for 1:

Select one:
a. total paid-in capital increases by a factor of 3.
b. retained earnings is decreased by the market value of the shares issued.
c. the market value of the company's stock normally falls by two-thirds.
d. the stockholders are assured of receiving larger cash dividends.

Answer 1

The market value of a company's stock typically falls by two-thirds when the company splits its common stock 3 for 1, as each share now represents a smaller portion of equity.

Step-by-step explanation:

When a company splits its common stock 3 for 1, the correct answer is c. the market value of the company's stock normally falls by two-thirds. This occurs because the total number of shares triples, but the value of the company remains the same. As a result, each share now represents a smaller portion of the company's equity, leading to an adjustment in the stock's market value.

It's important to note that this does not affect the total paid-in capital, nor does it decrease retained earnings. Also, a stock split does not guarantee larger cash dividends to the stockholders. Dividends are determined by the company's board of directors and can be influenced by various factors including profits, future investment plans, and cash flow considerations.