Stock Split - Dividend Policy, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com

when a company is doing really really
well you might hear that they've decided
to do a stock split so you might be
wondering what a stock split is and what
the economic effect of a stock split is
it's best to just jump right in with an
example to illustrate what a stock split
is so let's say that there was a firm
that just had a hundred shares
outstanding all right so there's just a
hundred shares of this firm let's say
that the par value is ten cents a share
ten cent part so now the firm just says
okay look everyone we're doing a
two-for-one split so this hundred shares
are now two hundred shares so there's
two hundred shares and they have a par
value of instead of ten cents now it's
five cents so it's it's basically
they're they're doubling the amount of
shares now you might say hey how can
they do that what are they just creating
shares well they're not giving shares
these extra hundred shares to like other
people or something that's diluting the
current owners ownership so if you own
10 shares so if you have 10 shares now
you have 20 right so if you do a little
bit of simple math here you see that 10
out of a hundred so you owned 10 percent
of this firm before right that's 10
percent you own 10 percent of company
now you own 20 out of 200 which is also
10% so the firm could do this because it
hasn't changed your ownership interest
it hasn't changed anyone's ownership
interest nothing really has changed here
so you might be saying ok well why do
this what what is the game that's being
played here
well the idea being that if we look at
just one individual share so let's take
one share if we take that one share out
of a hundred versus one share out of 200
we see that one share out of a hundred
that's one percent whereas one share out
of 200 is less than that it's actually
half of one percent right so what we've
done is we've taken the
you of any given share just one chair
and said okay we've basically cut it in
half right so if it was $50 before there
was the value and then we just all else
equal we split the stock then it should
be $25 value now but but a person's
individual ownership right no matter how
many shares they own that hasn't changed
it's just the value of an individual
share so okay well what the firm is
doing now is it's pretty clear they're
just trying to lower their stock price
right so the firm has a share price
let's say it's $700 so this firms just
doing fantastic they have a share price
of $700 what the firm is saying is hey
wait a minute this is maybe too
expensive for some mom-and-pop investor
or somebody who wants to buy shares of
our company maybe they don't have $700
or they do but they don't want to just
buy you know one share they they want
more than that so in any event they're
what they're trying to do is bring this
down we're trying to bring this down not
to bring it down to destroy value in the
firm because we've already seen when we
take and say okay you had 10 shares now
you have 20 everybody's proportional
ownership stays the same but what
they're trying to do is just make the
share price more reasonably priced and
again this doesn't affect the equity of
the firm there's not even there's no
journal entry there's nothing really of
economic substance going on it's just
basically the firm is doing this thing
where it's just kind of you know
reorganizing things of the same pie
right we've got the same pie here and
it's just dividing it up in a different
way right a hundred shares are now 200
shares just as easily so this is a
two-for-one stock split just as easily
the firm could have done a three for one
stock split a five for one stock split
doesn't matter as long as the firm
doesn't actually change a investors
actual proportional interest in the firm
the the company could do pretty much
anything it wants in terms of how it
divides up that pie and the main idea
just being it just wants to get the
share price so that more people can go
then Ford to buy a sheriff stop