FIN 534 RANK Change The World /fin534rank.com FIN 534 RANK Change The World /fin534rank.com | Page 143

e. One advantage of an open market dividend reinvestment plan is that it
provides new equity capital and increases the shares outstanding.
3. Which of the following statements is CORRECT?
a. When firms are deciding on the size of stock splits—say whether to
declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller
one, in this case the 2-for-1 split, because then the after-split price will
be higher than if the 3-for-1 split had been used.
b. Back before the SEC was created in the 1930s, companies would
declare reverse splits in order to boost their stock prices. However, this
was determined to be a deceptive practice, and it is illegal today.
c. Stock splits create more administrative problems for investors than
stock dividends, especially determining the tax basis of their shares
when they decide to sell them, so today stock dividends are used far
more often than stock splits.
d. When a company declares a stock split, the price of the stock typically
declines—by about 50% after a 2-for-1 split—and this necessarily
reduces the total market value of the equity.
e. If a firm’s stock price is quite high relative to most stocks—say $500
per share—then it can declare a stock split of say 10-for-1 so as to bring
the price down to something close to $50.
4. Which of the following statements is CORRECT?