Assume Andrusco\'s common stock is quoted on the OTCBB at 159 7/19. The VP of Fi

Question

Assume Andrusco's common stock is quoted on the OTCBB at 159 7/19. The VP of Finance recommends a 4-for-1 split to increase trading activity. Show the effects of this action on the BS, and on a shareholder of the company. Assume Andrusco's stock is trading in the Pink Sheets at 1 1/11. The VP of Finance recommends a 1-for-10 split. Show the effects of this action on the BS and a sharehota. Andruseo has just announced a 12% stock dividend with the stock priced at 63.79. show the effect of this cation on the company's BS and a shareholder.

Explanation / Answer

1. No. of shares to be issued to the common stockholders = 20000000

Value of each share = $1

Common stock capital = 20000000 shares x $1 = $20000000

Therefore, no effect on the balance sheet. There are plenty of arguments over whether a stock split is an advantage or disadvantage to investors. One side says a stock split is a good buying indicator, signaling the company's share price is increasing and therefore doing very well. This may be true, but on the other hand, a stock split simply has no effect on the fundamental value of the stock and therefore poses no real advantage to investors.

2. No. of shares after split = 20000000/ 10 = 2000000

Value of each share = 1 x 10 = $10

Common stock capital = 2000000 shares x $10 = $20000000

As in a regular stock split, a reverse split causes no actual change in the value of the company because the share price also changes. Reverse stock splits are often seen as negative corporate actions because they are a tactic used by companies that have seen their share prices fall into the $1 range and, therefore, run the risk of being delisted from stock exchanges that have minimum share price rules.

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