Stock Splits

Alright now let's discuss stock splits. So stock split is splitting the stock, it causes each share of stock to split into multiple shares based on the terms of the split. So stock split splits the stock, wow, interesting. So stock split, Well, we're gonna see, it's gonna have no effect on paid in capital retained earnings or total stockholders equity. All we're doing is changing the pie right, where before we might have had a pie, let's say cut like this. Well now we're just gonna cut the pie into different pieces, right, we're gonna split the pie into more pieces. So let me do those last two cuts. This is the stock split, another abstract painting here. So where we before had four pieces of one pie, the pie stays the same size, we're just splitting it into more pieces. Okay, so stop, a stock split is going to increase the number of common shares and decrease the par value per share. Okay, so let's go ahead and see uh some some terminology that we're gonna use here. So the terms for stock splits are generally gonna be written as X. For y. So the most common one you're gonna see is a two for one stock split. But you can see trickier ones where they'll do something like a three for two stock split or a five for two stock split. Well, I'm gonna get you ready to handle those kind of crazy stock splits, but for the most part you're gonna be dealing with something like a two for one stock split. Okay, so what I like to think about is a stock split ratio. This isn't a real ratio. Like all the ratios that we learn in this class. The split ratio is something that helps us um determine the new number of shares and the new par value. So we're dealing with the stocks. Generally the questions are going to ask you, how many shares are there outstanding after the stock split? What's the new par value after the stock split? What's the new market price after the stock split? Right. And that all depends on what the terms of the split. Our so the first thing we want to do is find that split ratio. It's gonna tell you something like X. For y, a two for one stock split. A five for two stock split. So notice how easy it is when it's a two for one stock split. Well it just equals two, right? So it's very simple, that's why you don't really need the ratio in that case. But if it's something like a five for two stock split, well now five for two, the answer is 2.5. So what does this tell us this, this split ratio tells us for each one share. How much are we getting? Uh how much is each one share splitting? So in the case of a two for one stock split, each one share is splitting into two shares. In the case of a five for two stock split, Each one share is splitting into 2.5 shares. Okay so what we're gonna do is we're gonna use that split ratio to calculate the new shares outstanding, the new par value and the new market price. So for the shares outstanding we need to multiply by the split ratio, we take the old shares outstanding times the split ratio. But when we're looking at the prices, the par value and the market price we divide by that split ratio, we're taking that previous market price or the previous par value and we're decreasing it we're dividing by that split ratio. So the old par value divided by the split ratio of the old market price divided by the split ratio. Okay. So um why don't we just go ahead and jump into this example right here and we'll try this first one right now so I'll leave those on the screen. So the growing company declared a two for one stock split on their 20 cent par value common stock. When 250,000 shares were outstanding, The market price per share at the time of the split was $40. Okay so when it's a two for one it's pretty easy you can imagine that two for one means that the every the prices are gonna be cut in half and we're gonna double the amount of shares but let's go through it with our split ratio. So the split ratio. And remember this isn't a real ratio I made this up because I think it makes it easier to do these problems. So the split ratio would be two for 12 divided by one, it's gonna equal to. So remember when we do a stock split, there's no journal entry. All we're doing is we're changing the market price, the par value and the shares outstanding. There's not gonna be any redistribution of retained earnings, there's not gonna be more common stock in the common stock account. None of that is changing. Okay. All we're doing is redistributing are changing the how we split the pie right as I did in my abstract drawing above. So there's no journal entry. Okay, so no journal entry, we might make a memo that will show the new uh new number of outstanding stock, the new part value etcetera. So let's go ahead and let's calculate each of these. I'm gonna get out of the way. So the new shares outstanding. What are we gonna do? We're gonna take the old shares. So there was 250,000 shares before well each share split into two. So now there's 500,000 shares outstanding. Okay, so now there's 500,000 shares. Is the new shares outstanding of this stock. Okay but notice that each of these shares is gonna have less value. So the new par value. The new par value is going to be the old par value of 20 cents. So 0.20 divided by the split ratio of two. Right? So it's gonna be halved to 10 cent par value. So notice even though there's twice as many shares, each of them has half the par value and each of them has half the market price. So the old market price was $40. We're gonna divide that by two. Our split ratio and we're gonna get $20 is the new market price. So see what's happened here. All we did was we split the stock into twice as much stock but the par value per share has decreased to 10 cents per share and the market price has decreased to half as much as well. $20 market price. Okay. So why don't you guys try the next one as a practice problem and see if you guys can figure out the new shares outstanding, new par value and new market price and then test it in the next video. Cool, let's try

Alright. How did you guys do? The growing company declared a three for two stock split on their 60 cent par value? Common stock when 400,000 shares were outstanding? The market price per share at the time of the split was $21. So notice in this case it's a little trickier. It wasn't just a two for one, we're not doubling the number of shares and having the prices, we've got a three for two stock split. So this is when my split ratio comes in handy. Three for two means our split ratio is gonna be one 0.5. Right? So 1.5 shares per one share that was previously. Okay. So what we wanna do, we wanna remember that? There's no journal entry, right? No journal entry. When we do a stock split, we only make a memo that shows the new number of shares. The new par value. Okay, So let's go ahead and see what each of these are. So the new shares outstanding. Well, we have to take the old shares outstanding of 400,000. And we're gonna multiply it by my split ratio of 1.5. And what does that give us? It should be 600,000. Right, I'm gonna double check 400,000 times 1.5. 600,000 shares outstanding afterwards. Okay, so the new shares outstanding is gonna be 600,000. How about our new par value are par value was previously 60 cents and we're gonna divide that by the split ratio of 1.5. So 60.60 divided by 1.5, That comes out to 0.4. So 40 cents is the new power value. And what about our new market price? The market price before was $21 divide that by 1.5. And that comes out to $14 market price. And I want to do one more calculation here just to show you that our common stock outstanding stays the same. So before we had 400,000 shares, times a 60 cent par value. Right? 40,000 shares with a 60 cent par value. What does that come out to 400,000 times .6. That comes out to 240,000. And now we have 600,000 shares with a 47 par value. So 600,000 times 0.4. Well that's also 240,000. Right, so our par value hasn't changed, we've just changed how we split the pie right now, it's going to be more shares with less par value per share. Cool. Alright, so that's the stock split right there. Let's go ahead and move on to the next video