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 the common stock account.
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 $0.25 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 stock split does not affect the total value of the company, only the number of shares outstanding and their par value. After the 4-for-1 stock split, the number of issued shares will increase to 10 million (2.5 million x 4) while the par value will be adjusted to $0.25 per share ($1 / 4). Therefore, choice C is correct. 
Choice A is incorrect because there is no transfer of funds involved in a stock split. 
Choice B is incorrect because for every one share of stock owned, a shareholder will receive three additional shares, not four, and will now own four shares in total. 
Choice D is incorrect because the company has enough authorized shares to issue.

A Company Has 10 Million Common Shares Authorized and 2