Which of the Following Statements Best Describes Stock Splits

question 68

Multiple Choice

Which of the following statements best describes stock splits?

• 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)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.
• C)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.
• D)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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