Stock Split Explained

Summary

This session delves into the concept of stock splits, illustrating how companies like Apple have utilized this strategy to adjust stock prices and increase accessibility. It explains the mechanics of both stock splits and reverse stock splits, using the analogy of a pizza pie to clarify that the total value remains constant despite changes in share quantity. The video also touches on the reasons behind companies performing stock splits, such as Apple's desire to join the Dow Jones Industrial Average, and clarifies that these actions do not require journal entries from an accounting perspective.

Takeaways

• 📈 A stock split is when a company divides its outstanding shares by a certain multiple, such as 2-for-1, to increase the number of shares and decrease the stock price proportionally.
• 🍕 The value of a stock investment remains the same after a split, similar to having more slices of the same pizza pie.
• 📉 Apple's 7-for-1 stock split in 2014 was done to reduce the stock price from approximately $700 to $100, making it more accessible and joining the Dow Jones Industrial Average (DJIA).
• 🏦 The DJIA is a price-weighted stock index, meaning the impact of a company's stock price on the index is proportional to its price, which influenced Apple's decision to split its stock.
• 💡 Companies may perform stock splits to make their stock appear less expensive and more attractive to a broader range of investors.
• 🔄 A reverse stock split is the opposite of a stock split, where the company reduces the number of shares and increases the stock price, often to meet listing requirements on stock exchanges.
• 📊 Par value per share is also adjusted during a stock split, effectively halving in a 2-for-1 split, but the total par value remains the same.
• 📝 There is no journal entry required for a stock split; it is merely a memorandum noting the change in share structure.
• 🚫 A company may opt for a reverse stock split to avoid being delisted from an exchange, like E-Trade did to move its stock price from below $1 to approximately $10.
• 📚 Studying multiple choice questions and understanding the concepts of stock splits and reverse splits can help in CPA exams and accounting courses.
• 💼 The speaker emphasizes the importance of self-investment in education, particularly for CPA exams, and encourages hard work and safety.

Q & A

What is a stock split?

A stock split is a corporate action in which a company divides its outstanding shares by a multiple, such as two-for-one, to increase the total number of shares while decreasing the price per share proportionally, without affecting the overall market capitalization of the company.

How does a two-for-one stock split affect the number of shares and stock price?

In a two-for-one stock split, if you own one share, the company replaces it with two shares. The stock price is also halved, so if it was previously $80, it becomes $40, maintaining the same total value for the investor.

What was Apple's stock price before the 7-for-1 split in 2020?

Before the 7-for-1 stock split in 2020, Apple's stock price was approximately $800 per share.

What is the result of a 7-for-1 stock split on the number of shares and stock price?

In a 7-for-1 stock split, for every one share you own, you receive seven new shares, and the stock price is divided by seven. So, if the price was $800, it becomes approximately $100 per share after the split.

Why do companies perform stock splits?

Companies perform stock splits to make their stock more accessible to a broader range of investors by reducing the stock price, which may appear expensive at high levels, and to meet certain stock exchange requirements, such as joining the Dow Jones Industrial Average.

What is the Dow Jones Industrial Average, and why did Apple want to join it?

The Dow Jones Industrial Average is a price-weighted stock index that represents 30 significant companies in the U.S. Apple wanted to join the Dow Jones Industrial Average to increase its visibility and influence within the market, but its high stock price could have disproportionately affected the index.

What is a reverse stock split, and why might a company perform one?

A reverse stock split is the opposite of a stock split, where a company reduces the number of outstanding shares and increases the stock price proportionally. Companies may perform a reverse stock split to meet stock exchange listing requirements, such as maintaining a minimum stock price, or to avoid being delisted.

What happened to E-Trade's stock price and shares during a reverse stock split?

During a reverse stock split, E-Trade consolidated 10 shares into 1 share, and the stock price was multiplied by 10, moving it away from the $1 threshold that could have led to delisting from the NYSE.

How does a stock split affect the company's total equity and par value?

A stock split does not change the company's total equity. The par value per share is adjusted proportionally to the split ratio, but the overall value of the company remains the same.

Is there a journal entry required for a stock split in accounting?

No, there is no journal entry required for a stock split in accounting. It is typically recorded as a memorandum, noting the change in the number of shares and the adjusted par value.

What is the purpose of discussing stock splits in the context of the CPA exam or accounting courses?

Discussing stock splits helps students and CPA exam candidates understand corporate actions that affect financial reporting and stock valuation, enhancing their ability to analyze and interpret financial statements and market events.