Impact of a Stock Split on a Financial Statement

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Stocks play a significant part in our economy. For many investors, stock splits seem to be too great of deal. Everyone loves a good deal. It is a Buy One Get One stock or more for free deal for the investors. Stocks can split into any ratios, but the most common ratio is 2-for-1, 3-for-1, and 3-for-2. Splits of 4-for-3, 5-for-2, and 5-for-4 have been offered to the investors in the past. Recently, Apple (AAPL) surprised content investors by declaring a massive 1-for-7 stock split and announcing a big second quarter earnings. Apple has split stocks four times since trading publicly. Apple's common stock split on a 2-for-1 basis on May 15, 1987, on June 21, 2000 and again on February 18, 2005 (Apple, 2014).

The stock split is simple. You have a $100 bill in your wallet, but you decide to carry five $20 bills instead because of the popularity of smaller $20 bill instead of a large $100 bill.
For transaction below, if you owned 10 million shares of XYZ Corporation at $10 per share initially, and the corporation offers a 2-1 stock split, upon the split you would own 20 shares worth $5 each. For the same concept, you would owe 30 million of $3.33 per share for a 3-for-1 split, and for a 3-for-2 split, you would owe 15 million of $6.66 per share.

Pre-Split Post-Split
2-for1
# of Shares 10M 20M
Share Price $10 $5
Market Cap $100M $100M

3-for-1
# of Shares 10M 30M
Share Price $10 $3.33
Market Cap $100M $100M

3-for-2
# of Shares 10M 15M
Share Price $10 $6.66
Market Cap $100M $100M

Why do companies issue splits if there is no increase or decrease to capitalization? What kind of financial impacts do the stock splits cause to the companies and investors?
First, the stock splits have greater psychological...

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... from http://www.apple.com/pr/library/2014/04/23Apple-Expands-Capital-Return-Program-to-Over-130- Billion.html

BRK/B:New York Stock Quote. (n.d.). Bloomberg.com. Retrieved April 28, 2014, from http://www.bloomberg.com/quote/BRK/B:US Hamburg, M. (2010, January 10). Berkshire Hathaway Inc. Shareholders Approve 50-for-1 Split of Its Class B Common Stock. . Retrieved April 26, 2014, from http://www.berkshirehathaway.com/news/JAN2010.pdf

Spiceland, J. D., & Sepe, J. F. (2013). Intermediate accounting (7th ed.). New York: McGraw-
Hill/Irwin, 1106-1108.

Smart, S. B., & Megginson, W. L. (2009). Introduction to financial management (2nd ed.). Australia:
South-Western Cengage Learning, 573-574.

Understanding Stock Splits. (2013, November 19). Investopedia. Retrieved April 28, 2014, from
http://www.investopedia.com/articles/01/072501.asp

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