Question

Which of the following explains why most companies choose to pay stock dividends​ (split their​ stock)? ​(Select the best choice​ below.) A. By splitting the​ stock, investors get a stock dividend which increases value. B. Companies use stock splits to keep their stock prices in a range that reduces investor transaction costs. C. Stock splits increase the amount of stock each investor​ holds, thus increasing investor welfare. D. There is no good reason to do a stock splitlong dashjust ask Warren Buffet.

Answer 1

Answer: Option B is correct.
Stock splits increases the number of stocks outstanding keeping the market capitalization unchanged.
Now, market capitalization=Share price*Number of shares outstanding
=>Share price=Market capitalization/Number of shares outstanding
So, if number of shares outstanding increases, share price will decrease.
Now, the share price of a stock will be available at a lower price, so people will start trading the stock increasing the liquidity of the stock and transaction cost will decrease due to lower share price also the share price will stay in a range.