Which of the Following Statements Is CORRECT

question 11

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 declines¾by about 50% after a 2-for-1 split¾and this necessarily reduces the total market value of the equity.
• D) If a firm's stock price is quite high relative to most stocks¾say $500 per share¾then 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 low¾say $2 per share¾then 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 splits¾say 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:

Pre-Tax Loan Rate

The interest rate on a loan calculated before taxes have been deducted.

CCA Class

Refers to the classification of fixed assets under the Canadian Capital Cost Allowance for the purpose of tax depreciation.

After-Tax Lease Payment

The lease payment amount after accounting for the tax benefits or obligations, impacting the net cost to the lessee.

Tax Rate

The share of income an individual or business entity is required to pay in taxes.