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Stock Splits
When a company's management believes the market price per share is too high, a stock split can be used to reduce the price to a level that is more accessible to a larger body of potential investors.
What is a Stock Split?
- Division of existing shares into multiple shares .
- Proportionally increases the number of shares and decreases the price per share.
- Has no effect on financial position.
- No journal entry
Wize Tip
A stock split is expressed as a ratio, for example a 2-for-1 stock split divides existing shares into 2 smaller shares.
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Example: Stock Splits
ABC Inc. has 400,000 outstanding common shares trading at $500 per share. In order to increase liquidity of its shares on the open market, the company has elected to do a 5-for-1 stock split.
What will be the effect on:
- the number of shares
- the market price per share
- the common shares book balance
Practice: Stock Splits
Wize Corp. has announced that they will do a 3-for-2 stock split in a few days. Currently there are 100,000 outstanding shares trading at $330 per share.
What will be the market price per share after the split?
Practice: Stock Splits
Bank of Alabama has just announced that it will perform a 3-for-5 reverse stock split in order to increase the market price per share. The company currently has 1,200,000 outstanding common shares trading at $2.67 per share.
What will be the market price per share after the split?