Learning Outcomes
- Recognize the effects of a stock split on the financial statements
A stock split is when a corporation reduces the par value of each share of stock outstanding and issues a proportionate number of additional shares. It also may affect the par value and market price per share, reducing them proportionately. However, the total dollar value of the shares outstanding does not change. No journal entry is required for a stock split.
EXAMPLE
A company has 10,000 shares outstanding. The par value is $16 per share. The fair market value per share is $20. The total capitalization (value of the shares outstanding) is $200,000 (10,000 x $20).
The company declares a 4-for-1 stock split. Multiply the number of shares by 4: 40,000 shares are outstanding after the split. Divide the par value by 4: each share has a par value of $4 after the split. Also divide the market value per share by four, resulting in $5 per share. The total capitalization (value of the shares outstanding) is still $200,000 (40,000 x $5).
As an investor, if you held 100 shares before the split, you would now hold 400 shares.
Often, if a company thinks the stock price is too high, it will split the stock to lower the per share price.
Between 1981 and 1999, Home Depot split its stock 13 times by various factors, and so each original share ended up being roughly 342 shares, but before we look at that in more detail, let’s check your understanding of stock splits in general.
Practice Question
