Question

The stockholders' equity section of the balance sheet of the XYZ Corp. is as follows:

Common Stock ($5 par)

$ 20,000,000



Retained Earnings

$176,000,000



Total

$196,000,000


Assume that the company now splits its stock 5-for-1, show the resulting stockholder's equity section.

Answer 1

A 5-for-1 stock split of XYZ Corp. increases the number of shares fivefold and divides the par value per share by five, leaving the total stockholders' equity unchanged at $196,000,000, but altering the Common Stock to have a $1 par value.

Step-by-step explanation:

When XYZ Corp. conducts a 5-for-1 stock split, the number of outstanding shares increases by a factor of five, while the par value per share is divided by five. The total equity of the company remains unchanged because a stock split does not affect the firm's valuation; it only alters the number of shares and the par value per share.

Here's the resulting stockholders' equity section after the 5-for-1 stock split:

• Common Stock ($1 par, because $5 divided by 5) = $20,000,000
• Retained Earnings = $176,000,000
• Total = $196,000,000

Note: Although the par value per share is now $1, the total value allocated to Common Stock on the balance sheet remains the same at $20,000,000 since the increased number of shares compensates for the decreased par value per share.