Stock Split Essay

2396 Words Feb 18th, 2008 10 Pages
EFFECTS OF STOCK SPLIT
Introduction
The purpose of this research paper is information retrieval regarding stock split practice in a modern stock market, its major reasons and valuation effects on the company's financial position.
According to the definition stock split is a method commonly used to lower the market price of a firm's stock by increasing the number of shares belonging to each shareholder. Companies are able to split their stocks in any number of ways. The most common stock splits are, 2-for-1, 3-for-2 and 3-for-1. For example, if you own 100 shares of a company that trades at $100 a share and it declares a 2-for-1 stock split, you will own a total of 200 shares at $50 a share after the split. It is also possible to have a
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They believe that lowering the market price will make their stocks more affordable for these investors and thereby stimulate and increase trading activity.
However, the low price is not the guaranty of success. For instance, there are many cheep stocks at the market, which nobody wants to buy because there is no potential of these companies.
Another economic reason why company might do a stock split is its optimism about the future. Eventually the stock split causes an increase in the numbers of shares on the market, which lead to decreasing of Earning Per Share (EPS). It is normal for EPS to decline after stock split because EPS = Net Income/ Total of shares outstanding. Since Net Income will not be impacted by the stock split, EPS has to go down due to increase in amount of shares outstanding. However, if the company has good expectations about their financial future, it might not be too concern about decline in EPS.
In the practice we can see that the theory works and summation of increasing numbers of investors willing to buy the stocks and underline company's signal of its optimistic view at the future lead to increasing of Macy's common share's price.
However, we can assume that Macy's positive prognoses about the future are not completely proved in reality and price eventually went down. Again, it provides evidence that price is not the key point of buying decision. The main factor, which stimulates

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