Question #31
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 12
Status: Unattempted
Correct Answer: B
Question
Stock splits:
Answer Choices:
A. increase firm value
B. are less common than stock dividends
C. do not in and of themselves affect firm value
Explanation
Stock splits divide up each existing share into multiple shares. The price of each share will
drop correspondingly to the number of shares created, so there is no change in the
owner's wealth. Empirical research has shown that in the absence of a dividend yield
increase, the stock price falls to the stock split ratio of the original price (i.e., to 25% of the
original price in a 4-for-1 stock split). This makes sense, given that the investor's
percentage ownership of the company has not changed.