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:

Elasticity Of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good, quantitatively determined by the percentage change in quantity supplied divided by the percentage change in price.

Tax Revenue

The revenue acquired by governments via tax collection.

FICA

The Federal Insurance Contributions Act tax, a United States federal payroll (or employment) tax imposed on both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.

Federal Insurance Contributions Act

A U.S. law that requires employees to contribute to Social Security and Medicare, with matching contributions from employers.