Why Does a Company Split Its Stock

question 69

Multiple Choice

Why does a company split its stock?

• A) The stock is trading at a low price, and the company wants to increase its stock value.
• B) It wants fewer shares outstanding.
• C) The stock is trading at a high price, and the company wants to bring the price in line with a theoretical ideal range.
• D) It wants the total market capitalization to be lower than the current level.
• E) The company wants to guarantee that the stock price will increase.

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Definitions:

Homothetic Preferences

A situation in consumer theory where a consumer's preference structure can be represented by a utility function that is proportionally scalable.

Engel Curve

A graphical representation that shows the relationship between income and the demand for a good or service, keeping all other factors constant.

Utility Function

A mathematical representation of how a consumer ranks different baskets of goods according to their level of satisfaction.

High Income

Refers to individuals or households that earn a significantly higher amount of money compared to the average income levels within a specific geographic region or within a particular demographic.