Question

Candela Company has retained earnings of $500,000, common stock of $400,000, and total common stockholders’ equity of $1,200,000. It has 200,000 shares of $2 par value common stock outstanding which is currently selling for $5 per share. If Candela Company declares a 2-for-1 stock split on its common stock, which of the following will occur? how is the calculation done?

Answer 1

Answer: A stock split will not have any effect on the total common stockholders' equity of $1,200,000.

Explanation:

A stock split is the issue of shares to the stockholders of a company. In this case, a stockholder will have 2 shares for a 1 share held earlier. Because the total equity does not change, the value of each share falls, reducing the market price. The total number of common stock however will increase.

The calculation is done in the following way.

Candela has common stock outstanding of 200,000

2x : 1 ( 2 x 200,000: 200,000)

=400,000 common stock