Question

Which of the following statements is CORRECT?

Answer 1

Answer: 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 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low--say $2 per share--then it can declare a "reverse split" of say 1-for-10 so as to bring the price up to somewhere around $20 per share.

Explanation:

Stock Splits usually occur when a company believes that its stock price is relatively high compared to most other stocks.

If the stock is $500 per share, a stock split of 20-1 would divide the stock so that it comes to;

=500/20

= $25 per share.

If the company believes that prices are too low, they can do a reverse split or a stock merge to bring the price up by merging stocks together. If Stock is trading at $2 per share, a 1 - 10 would take it up to;

= 2 * 10

= $20 per share.