Stock Split | What is a stock split | Financial Management | Management Notes
Stock Split is the action taken by the company to increase the firm’s number of outstanding shares in the market because of the falling share price of the company by reducing the par value of share in the market. Unlike in stock dividend, stock split does not involve transfer of funds from retained earnings (R/E) to paid-in-capital and common stock accounts.
Note: There will be no effect on value of Common Stock or we can say Total Shareholders’ Equity Account remains unchanged as Paid-in capital & retained earnings also remain unchanged.
Example: XYZ Company
Let’s take an example to illustrate the effect of stock split and justify the above mentioned points.
|
XYZ Company Total Shareholder’s Equity Account [Before Stock Split] |
|
| Particulars | Amount in Rs |
| Common Stock [ 10,000 Shares @ Rs 100] | 1,000,000 |
| Additional Paid in Capital | 1,000,000 |
| Retained Earnings | 4,000,000 |
| Total Shareholder’s Equity | 6,000,000 |
Let us assume that XYZ Company announces 2-for-1 Stock Splits. After this announcement,
- The outstanding shares of XYZ company increases from 10,000 Shares to 20,000 Shares [10,000 shares *2/1].
- Par Value of Shares of XYZ company reduces from Rs 100 to Rs 50 [ Rs 100*1/2].
|
XYZ Company Total Shareholder’s Equity Account [After Stock Split] |
|
| Particulars | Amount in Rs |
| Common Stock [ 20,000 Shares @ Rs 50] | 1,000,000 |
| Additional Paid in Capital | 1,000,000 |
| Retained Earnings | 4,000,000 |
| Total Shareholder’s Equity | 6,000,000 |
Play Quiz
[wp_quiz id=”6812″]
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,