When Walt Disney Co. declared a 4:1 split of its common stock, the announcement

Question

When Walt Disney Co. declared a 4:1 split of its common stock, the announcement boosted the entertainment company's shares up by $3.50 per share. A. What is a 4:1 stock split, and how did it affect the financial statements of Walt Disney Co.? B. Why should the market value of Disney's stock rise? C. The Wall Street Journal once reported that the stock split was "a psychological boost and an indication that management has confidence in their perfoormance and that the stock price can be sustained." Explain how this explanation could account for the sock price increase.

Explanation / Answer

The company’s board of directors decides to split the stock 4-for-1. Right after the split takes effect, the number of shares outstanding would be 4 times. It has almost no effect on financial statements. The value of equity share capital remains same. However in schedule to balance sheet the number of outstanding shares are shown 4 times of the shares before the split. The value will remain same.

While a split in theory should have no effect on a stock's price, it often results in renewed investor interest, which can have a positive impact on the stock price. Thus, it may result in increase in stock price.

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