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answer to the question is highlighted in red.
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12. Consider the economic effect of paying a
stock dividend and the economic effect of a splitting a stock. Assume that the firm
engages in no other action or activity in either case and that stockholders
have all the same information as the
firm’s managers. If this is true, everything else equal, which of the following
statements is correct?
a. Both the stock dividend and the stock split have the same
relative economic impact; both actions should not change the total market value of the firm’s stock.
b. Both
the stock dividend and the stock split will cause the per-share value of the
stock to decline, but the stock dividend will have a greater relative economic
impact than the split.
c. Both
the stock dividend and the stock split will cause the per-share value of the
stock to decline, but the split will have a greater relative economic impact
than the stock dividend.
d. In
general, both the stock dividend and the stock split will result in a decrease
in the total market value of the firm’s stock.
e. None
of the above is correct.
Neither a stock split nor a stock dividend produces an economic
effect, which means that neither the value of the firm nor the wealth of the
stockholders will change as the result of these actions by themselves.
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