Question

What effect will a two-for-one stock split have on the following items found on a firm's financial statements?

1. Earnings per share $5.37. Round your answer to the nearest cent.

   Initial amount	New amount	Effect
   $5.37	$	increase, decrease, or no change

2. Total equity $9,000,000. Round your answer to the nearest dollar.

   Initial amount	New amount	Effect
   $9,000,000	$	increase, decrease, or no change

3. Long-term debt $4,400,000. Round your answer to the nearest dollar.

   Initial amount	New amount	Effect
   $4,400,000	$	increase, decrease, or no change

4. Additional paid-in capital $1,692,000. Round your answer to the nearest dollar.

   Initial amount	New amount	Effect
   $1,692,000	$	increase, decrease, or no change

5. Number of shares outstanding 800,000. Round your answer to the nearest whole number.

   Initial amount	New amount	Effect
   800,000		increase, decrease, or no change

6. Earnings $4,300,000. Round your answer to the nearest dollar.

   Initial amount	New amount	Effect
   $4,300,000	$	increase, decrease, or no change

Answer 1

In a 2-for-1 stock split, an additional 1 share is given for each share held by a shareholder. So the total number of shares outstanding will be doubled. As shareholders will have 2 shares instead of 1, post split.

1. EPS of $ 5.37 per share will now decrease as the number of shares outstanding has increased, new EPS will be $ 5.37/2 =$ 2.685 or $ 2.7 (rounded to nearest cent)
2. In a split stock price will change and number of shares outstanding will change but the value of equity will remain unchanged as Shareholder equity on the firm's balance sheet is independent of number of shares outstanding. So total equity of $ 9,000,000 there will be no change
3. Long term debt has no relation with number of shares or stock price as it is independent of equity figures. So long term debt of $ 4,400,000 there will be no change.
4. Additional paid-in-capital is recorded at the initial public offering (IPO) only any transactions that occur after the IPO do not increase the additional paid-in capital account. So $ 1,692,000 there will be no change.
5. As mentioned above split increases the number of shares. So shares outstanding 800,000 will increase and become 1,600,000 (old outstanding * new share offered) (800,000*2)
6. Companies earning depends on the business operation and not on stock split. So earning of $ 4,300,000 there will be no change.