/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 6 When a company wants to reduce t... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 11: Problem 6

When a company wants to reduce the market price per share of its stock, what action should it take? a. Issue a cash dividend b. Issue a stock dividend c. Do a reverse stock split d. Do a forward stock split

Short Answer

Expert verified
The company should do a forward stock split.

Step by step solution

01

Understanding the Question

The question asks what action a company should take to reduce the market price per share of its stock. Understanding the terminology: a cash dividend provides direct cash to shareholders without affecting the share price directly; a stock dividend gives additional shares, possibly diluting share value; a reverse stock split reduces the number of shares, increasing price per share; a forward stock split increases shares, reducing price per share.
02

Evaluating Each Option

Review each option: (a) Issuing a cash dividend does not affect the stock price directly in terms of splitting or changing the stock structure. (b) Issuing a stock dividend may increase the number of shares and can temporarily dilute the price per share but isn't typically used to actually reduce stock price directly. (c) A reverse stock split decreases the number of shares, which increases the stock price. (d) A forward stock split increases the number of shares in the market which typically reduces the stock's market price per share.
03

Selecting the Correct Option

Based on the evaluation, a forward stock split (d) is the action that causes the market price per share to decrease by increasing the number of shares available.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Forward Stock Split
A forward stock split is like slicing a pizza into more pieces without baking a bigger pizza. Imagine you have a stock worth $100. If a company does a 2-for-1 stock split, this means for every one share, you now have two. So, if you initially had 10 shares, you would now have 20. In this case, the overall value of your investment remains the same, but the market price per share is halved, moving from $100 to $50 per share.

This strategy is beneficial for making shares more affordable and attractive to investors. Often, a company will choose a forward stock split to encourage trading activity and to appeal to smaller investors who might find lower-priced shares more accessible.
  • Increases the number of shares available.
  • Lowers the market price per share.
  • Doesn't affect the total value of shares owned.
Market Price Per Share
The market price per share is simply how much investors are willing to pay for a single share of a company's stock at any given time. This price fluctuates based on demand and supply, reflecting the perceived value of the company.

When evaluating the stock price, keep in mind that various factors can influence it, such as the company's performance, overall economic conditions, and investor sentiment. Stock splits, such as forward splits, directly impact this metric by dividing the price according to the split ratio, thereby making shares easier to purchase without altering the company's overall market value.
  • Reflects the perceived value of a company.
  • Varies with market demand and supply.
  • Affected by corporate actions like stock splits.
Stock Dividends
Stock dividends are a way for companies to reward their shareholders without reducing their cash reserves. Instead of giving out cash, the company gives additional shares to its investors based on the number of shares they already hold.

For instance, if a company announces a 10% stock dividend and you own 100 shares, you would receive 10 additional shares. While stock dividends increase the number of shares outstanding, they may briefly dilute the price per share. However, they don't necessarily reduce the market price directly, unlike a forward stock split. They merely change the distribution of ownership without affecting the company's market value.
  • Provide shareholders with more shares.
  • Do not decrease the market price per share directly.
  • Preserve company's cash reserves.
Reverse Stock Split
A reverse stock split is the opposite of a forward stock split. Think of it as combining slices of cake back into fewer pieces. In a reverse split, a company decreases the number of its outstanding shares, often with the intention of increasing the market price per share.

For example, if a company performs a 1-for-2 reverse split, two existing shares become one. The share price roughly doubles as a result, as the number of shares is halved while the overall market value of the company remains unchanged. Companies may opt for a reverse stock split to meet stock exchange listing requirements or to make their stock look more valuable.
  • Decreases the number of shares.
  • Increases the market price per share.
  • Aims to potentially boost the perceived value of the stock.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Dividend Distribution Chauncey Corporation began business on June 30,2016 . At that time, it issued 20,000 shares of \(\$ 50\) par value, six percent, cumulative preferred stock and 90,000 shares of \(\$ 10\) par value common stock. Through the end of 2018 , there had been no change in the number of preferred and common shares outstanding. Required a. Assume that Chauncey declared dividends of \(\$ 69,000\) in \(2016, \$ 0\) in 2017 , and \(\$ 354,000\) in 2018. Calculate the total dividends and the dividends per share paid to each class of stock in 2016,2017 , and \(2018 .\) b. Assume that Chauncey declared dividends of \(\$ 0\) in \(2016, \$ 120,000\) in 2017 , and \(\$ 186,000\) in 2018. Calculate the total dividends and the dividends per share paid to each class of stock in 2016,2017 , and \(2018 .\)

Stock Dividends White Corporation has 80,000 shares of \(\$ 5\) par value common stock outstanding. At year-end, the company declares a five percent stock dividend. The market price of the stock on the declaration date is \(\$ 20\) per share. Four weeks later, the company issues the shares of stock to stockholders. a. Prepare the journal entry for the declaration of the stock dividend. b. Prepare the journal entry for the issuance of the stock dividend. c. Assume that the company declared a 30 percent stock dividend rather than a five percent stock dividend. Prepare the journal entries for (1) the declaration of the stock dividend and (2) the issuance of the stock dividend.

Where do the following accounts (and their balances) appear in the balance sheet? a. Dividends Payable-Common Stock b. Stock Dividend Distributable

Dividend Distribution Ryan Corporation began business on March 1, 2016. At that time, it issued 20,000 shares of \(\$ 60\) par value, seven percent cumulative preferred stock and 100,000 shares of \(\$ 5\) par value common stock. Through the end of 2018 , there had been no change in the number of preferred and common shares outstanding. Required a. Assume that Ryan declared dividends of \(\$ 0\) in \(2016, \$ 195,000\) in 2017 , and \(\$ 200,000\) in 2018 . Calculate the total dividends and the dividends per share paid to each class of stock in 2016 , 2017, and \(2018 .\) b. Assume that Ryan declared dividends of \(\$ 0\) in \(2016, \$ 90,000\) in 2017 , and \(\$ 190,000\) in 2018 . Calculate the total dividends and the dividends per share paid to each class of stock in 2016 , 2017, and \(2018 .\)

Distinguish between authorized shares and issued shares. Why might the number of shares issued be more than the number of shares outstanding?
See all solutions

Recommended explanations on Math Textbooks

Pure Maths

Read Explanation

Calculus

Read Explanation

Geometry

Read Explanation

Decision Maths

Read Explanation

Theoretical and Mathematical Physics

Read Explanation

Mechanics Maths

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.