A Company Has 10 Million Common Shares Authorized and 2

question 7

Multiple Choice

A company has 10 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)There will be a transfer of $2.5 million from retained earnings to the common stock account.
• B)For every one share of stock owned,a shareholder will receive four shares and will now own 5 shares of stock.
• C)The shares issued and outstanding will all quadruple while the par value will be reduced to $0.25 per share.
• D)The company will be unable to declare a 4-for-1 split because it does not have enough authorized shares to issue the split.

---

Definitions:

Transaction

An exchange or transfer of goods, services, or funds between two or more parties.

Deadweight Losses

Efficiency losses in an economy occurring when total societal welfare is not maximized, typically as a result of market distortions like taxes or subsidies.

Competitive Equilibrium

A state in a market where demand equals supply, meaning that there's no excess supply or demand at the current price.

Allocative Efficiency

A state of resource allocation where it is impossible to make any one individual better off without making someone else worse off, maximizing societal welfare.