Which of the Following Statements Is CORRECT

question 55

Multiple Choice

Which of the following statements is CORRECT?

• A) 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.
• 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.
• E) 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.

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Definitions:

Period Cost

Expenses that are not directly tied to the production process and are incurred regardless of the volume of production, such as selling, general, and administrative expenses.

Manufacturing Overhead

Indirect factory-related costs that are incurred when a product is manufactured, including costs related to maintenance, utilities, and equipment depreciation.

Raw Materials Inventory

This represents the stock of basic materials awaiting to be processed into finished goods.

Work in Process

Inventory that includes all the materials, labor, and overhead costs for products that are in the production process but not yet completed.