Question

Explain why a stock split or reverse split does not impact to a firm’s capital structure and shareholder equity.

Answer 1

A stock split increases the number of shares outstanding in the market. A stock can be split for 2 for 1, 3 for 1 or 5 for The value of the shares and the market capitalization does not increase after a stock split. It is done for the following purposes:

1.It reduces the price of the shares making it more affordable for the investors. It is usually done when the price of the share rise too high.

2.it increases the liquidity of the company’s shares.

Reverse stock split

Reverse stock split is the opposite of a stock split. It exchanges a large number of shares for a small number of shares. Like stock splits, the value of the shares and the market capitalization does not increase after a reverse stock split. It is done for the following purposes:

1.Eliminating small stockholders.

2.To increase stock price.