Question

Which of the following is the effect of a stock split?

a. An increase in expenses

b. An increase in the earnings per share

c. An increase in net assets

d. No change in net assets

Answer 1

(D) The effect of a stock split is that there will be No change in net asset.

Explanation: The total value of shareholders' investments will not change after the split, however, because the post-split shares will be priced at half of the net asset value (NAV) of pre-split shares. A reverse split increases the price per share and proportionately reduces the number of shares outstanding for a fund.

If you own a stock that declares a split, the number of shares you would own after the split increases. However, the price per share reduces. This is because the market capitalisation remains the same. So, as an investor, though the price you get for each share actually declines, the total number of shares increases.