Question

Magnum Company, which had 45 000 of its ordinary shares originally issued at $3 now has a 3-for-1 share split.

The market price of the share was $30 per share before the split.

Which of the following is true as a result of the split?

		The contributed capital does not change
		The balance in the ordinary shares account increased to $135 000
		The market price of the share was not affected
		There were 15 000 ordinary shares on issue after the split

Answer 1

" The contributed capital does not change" is the correct statement as a result of stock split.

Stock Split: It is a concept where there will be an increase in the no. of shares held by an investor by splitting the ordinary share into small shares. As a result of this the market value of each share will reduce in accordance with splitting factor. The total market value of the company stock & contributed capital will remain same. No new shares will be issued.

In the given case of Magnum Company, after split of shares at 3- for -1, the market value of each share wiil be $10 and the no. of shares will increase to 135000 from 45000 shares.