6.9: Stock Splits

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A stock split is when a corporation reduces the par value of each share of stock outstanding and issues a proportionate number of additional shares. This does affect the number of shares outstanding and, therefore, the number of shares dividends will be paid on. It also may affect the par value and market price per share, reducing them proportionately. However, the total dollar value of the shares outstanding does not change. No journal entry is required for a stock split.

Example

A company has 10,000 shares outstanding. The par value is $16 per share. The fair market value per share is $20. The total capitalization (value of the shares outstanding) is $200,000 (10,000 x $20).

The company declares a 4-for-1 stock split. Multiply the number of shares by 4: there are 40,000 shares outstanding after the split. Divide the par value by 4: each share has a par value of $4 after the split. Also divide the market value per share by 4, resulting in $5 per share. The total capitalization (value of the shares outstanding) is still $200,000 (40,000 x $5).