Answer:
2) There will be no effect on total common stockholders' equity.
Explanation:
<em>Step 1: Determine liabilities</em>
This can be expressed as;
E=A-L
where;
E=Common stockholders equity
A=total assets
L=total liabilities
In our case;
E=$1,200,000
A=500,000+(5×200,000)=500,000+1,000,000=$1,500,000
L=unknown
replacing;
1,200,000=1,500,000-L
L=1,500,000-1,200,000=$300,000
Total liabilities=$300,000
<em>Step 2: Determine current asset value</em>
After 2 for 1 split;
shares after split=200,000×2/1=400,000
price after split=5×1/2=$2.5
Current asset value=(400,000×2.5)+500,000=$1,500,000
<em>Step 3: Determine equity after split</em>
Equity after split=1,500,000-300,000=$1,200,000
The stockholders equity after split=$1,200,000
The stockholders equity after the 2-for-1 split remains the same.
