Question

Stock splits can be used to: C) increase the par value per share while decreasing the market price per share. A) adjust the market price of a stock so it falls within a preferred trading range B) decrease a company's excess cash thereby lowering agency costs. E) adjust the debt-equity ratio to its preferred level D) increase the total equity of a firm.

Answer 1

A) adjust the market price of a stock so it falls within a preferred trading range

Step-by-step explanation:

A stock split is when a company increases the number of its shares outstanding.

for example if a company has 6 million shares outstanding at a price of $10, earning per share is $1 and dividend per share is $2. this company announces a 2 for 1 split :

the number of outstanding shares becomes 2 x 6 million = 12 million

stock price becomes = $10 / 2 =$5

earning per share = $1 / 2 = $0.50

dividend per share = $2 / 2 = $1

After a stock split, the price of the shares falls. so it can be used to adjust the market price of a stock so it falls within a preferred trading range.

A stock split doesn't affect the balances in shareholders equity account.

Stock split doesn't affect the cash holdings of the firm.

Market capitalisation doesn't change after a split, so stock value doesn't change.