Which of the following statements is correct? a. When firms are deciding on the

Question

Which of the following statements is correct? a. 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 b. 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 reverse splits are illegal today c. 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 d. When a company declares a stock split, the price of the stock typically declines--for example, by about 50% after a 2-for-1 split--and this necessarily reduces the total market value of the firm's equity e. 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 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low--say $2 per share--then it can declare a "reverse split" of say 1-for-10 so as to bring the price up to somewhere around $20 per share

Explanation / Answer

The correct statement is "e".

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 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low--say $2 per share--then it can declare a "reverse split" of say 1-for-10 so as to bring the price up to somewhere around $20 per share.

Explanation:

To bring the price equal to the other securities in the market it can be possible to split a high priced stock into small stocks of small amounts. On the opposite site if the price is relatively on the lower side a "reverse split", means 10 or 15 shares combined to form one share, can be exercised to match with the market.

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