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:

Average Variable Cost Curve

A graphical representation that shows the change in variable cost per unit of output as the level of production is altered.

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, leading to cost per unit of output decrease with increasing scale.

Average Fixed Costs

The constant expenses in production, which remain unchanged regardless of output levels, when divided by the volume of output created.

U-shaped

A description often used in economics to describe the graphical representation of a situation where certain costs initially decrease, reach a minimum, and then start to increase as output expands.