A company has 10 million common shares authorized and 2.5 million shares issued. The par value is $1 per share and the market price is $30 when the company declares a 4-for-1 stock split. Which of the following is correct?
A) There will be a transfer of $2.5 million from retained earnings to contributed capital.
B) For every one share of stock owned, a shareholder will receive four shares and will now own 5 shares of stock.
C)The shares issued and outstanding will all quadruple while the par value will be reduced to $.25 per share.
D)The company will be unable to declare a 4-for-1 split because it does not have enough authorized shares to issue.

Question

Quizplus · Accepted Answer

A 4-for-1 stock split means that each share of stock will be split into four shares, increasing the number of shares outstanding. Therefore, the 2.5 million shares will quadruple to 10 million shares issued and outstanding. The par value per share will be reduced to $0.25 per share to reflect the split. There is no transfer of funds from retained earnings to contributed capital in a stock split. The shareholder will receive four shares for every one share owned, meaning they will own a total of 10 shares after the split (assuming they do not sell any of their shares). The fact that the company only has 10 million authorized shares is not relevant to the question, as the company is only issuing and splitting its 2.5 million shares that are already authorized.

A Company Has 10 Million Common Shares Authorized and 2