Question

Which of the following statements regarding stock splits is incorrect?

a) A stock split decreases the market price of the shares.
b) A stock split is an increase in the number of authorized, issued, and outstanding shares.
c) A stock split increases total owners' equity.
d) A stock split involves a reduction in the share's issue value.

Answer 1

The incorrect statement about stock splits is that they increase total owners' equity. In reality, they divide the existing equity into more shares without altering the total value.

Step-by-step explanation:

The statement regarding stock splits that is incorrect is: c) A stock split increases total owners' equity. A stock split does not increase the total owners' equity; instead, it simply divides the existing equity into a larger number of shares, thereby reducing the price per share without changing the total value of equity.

During a stock split, the number of shares increases (b), which typically results in a decrease in the market price of the shares (a). This is done to make the stocks more affordable and appealing to a broader range of investors. The value of each share is reduced accordingly (d), but the overall value of the company as represented by the market capitalization remains unchanged.