Question

A company has 20 million common shares authorized and 2.5 million shares issued. The par value is $1 per share and the market price is $30 when the company declares a 4-for-1 stock split. Which of the following is correct? _______

A) For every one share of stock owned, a shareholder will receive four shares and will now own 5 shares of stock.

B) The company will be unable to declare a 4-for-1 split because it does not have enough authorized shares to issue.

C) There will be a transfer of $2.5 million from retained earnings to the common stock account.

D) The shares issued and outstanding will all quadruple while the par value will be reduced to $0.25 per share.

Answer 1

When a company go for stock split, the number of shares will increase and the rate per share will decrease but the amount of shares will be same. In this case, the company issues 4 for 1 stock split, which means for every one share, four shares will be issued to shareholders so the number of shares will increase to 10 million(2.5 million * 4) and the share price will decrease to $0.25($1 per share/4 split). But the total amount of stock will be same as $2.5 million(10 million *0.25 per share).

Therefore option D( The shares issued and outstanding will all quadruple while the par value will be reduced to $0.25 per share.) is correct