Which of the following statements are true of a “two-for-one stock split?”:
1. It may signal higher future earnings
2. By creating more shares at a lower price, marketability may be improved
3. It increases the “Equity Section” of a company’s Balance Sheet
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. All three are true
Equity is not changed.
To determine which statements are true of a "two-for-one stock split," let's examine each statement individually:
1. It may signal higher future earnings:
A stock split does not directly signal higher future earnings. A stock split is usually implemented by a company to increase the number of outstanding shares and reduce the stock price per share. This can make the stock more affordable and accessible to a broader range of investors, potentially increasing trading activity. However, it does not directly indicate higher future earnings. Therefore, statement 1 is incorrect.
2. By creating more shares at a lower price, marketability may be improved:
This statement is generally true. A stock split increases the number of outstanding shares and reduces the stock price per share. This can make the stock more affordable to a larger number of investors, which, in turn, can increase the demand and trading volume for the stock. The increase in marketability can provide more liquidity and potentially lead to improved market efficiency. Therefore, statement 2 is correct.
3. It increases the "Equity Section" of a company's Balance Sheet:
A stock split does not directly increase the equity section of a company's balance sheet. Although the number of shares outstanding increases, the par value per share decreases by the same proportion. As a result, the total value of the common stock (which is a component of the equity section) remains the same before and after the stock split. Therefore, statement 3 is incorrect.
In summary, statements 1 and 3 are incorrect, while statement 2 is correct. Therefore, the correct answer is option c.