Which of the Following Statements Is CORRECT

question 47

Multiple Choice

Which of the following statements is CORRECT?

• A)When firms are deciding on the size of stock splits-say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
• B)Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices.However, this was determined to be a deceptive practice, and it is illegal today.
• C)Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
• D)When a company declares a stock split, the price of the stock typically declines-by about 50% after a 2-for-1 split-and this necessarily reduces the total market value of the equity.
• E)If a firm's stock price is quite high relative to most stocks-say $500 per share-then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50.Moreover, if the price is relatively low-say $2 per share-then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.

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Definitions:

Variable Cost

Costs that vary directly with the level of production or sales volume, such as raw materials and direct labor.

Fixed Cost

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance premiums.

Zero Salvage Value

An indication that an asset will have no residual value at the end of its useful life.

Incremental Cost

The additional cost associated with manufacturing one more unit of product or providing an additional service.