Final answer:
The statement that firms use stock splits to lower the stock price and enhance its trading appeal is true. This action does not change the company's market capitalization but can make the stock more accessible to investors. Stock investments generate returns through dividends or capital gains, and decisions on financial activities are made by the firm's management.
Step-by-step explanation:
The statement about stock splits being used by a firm when it believes the price of its stock is too high to enhance the stock's trading appeal is true. When the price per share of a stock is high, it might deter small investors from buying the stock because they could find it too expensive or because it does not fit within their investment strategies in terms of diversification. A stock split increases the number of shares in circulation and reduces the price per share without changing the market capitalization of the company. For example, in a 2-for-1 split, each share owned by an investor is converted into two shares, halving the price per share. The intention behind a stock split is often to make shares more accessible to a wider range of investors, potentially increasing liquidity and trading activity in the stock. It does not change the overall value of the investors' holdings but may contribute to an increase in shareholder value over time.
Investors generally expect dividends or capital gains as a return on their investment in a stock. Dividends are direct payments made to shareholders, while capital gains occur when an investor sells the stock for a price higher than the purchase price, as illustrated in the Walmart stock example provided.
The decisions about issuing stock, paying dividends, or reinvesting profits are made by the firm's management and board of directors, keeping private and public firms' governance structures in mind.