Question 3 OR (a) part ii

Stock split

2 marks

Time to write: About 4 minutes

From an older CBCS paper

Question

Question 3 OR (a) part ii · 2 marks

Write short notes on:

Stock-split

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

4 minfor 2 marks

Read from the question

short notesA note opens with the meaning, then two or three key points. No long introduction.

What the paper leaves open

Stock split is examined here as a dividend-policy topic.

Write it in this order

1 Meaning and effect on capital and holdings 1 mark 2 min
2 Purpose, advantages and limitations 1 mark 2 min

Easy marks

Step 1 opens with the meaning: a one-line definition, the quickest mark in it.

Try it first. About 4 minutes for 2 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Meaning. A stock split divides one share into several shares of a smaller face value, for example one share of ₹500 into five shares of ₹100. The share capital, the reserves and each shareholder's proportionate holding do not change; only the number of shares rises and the face value (and, in proportion, the market price) falls. Nothing is distributed, so a split is not a dividend.

Why it is done. It is a tool for regulating the share price: when the price rises beyond a limit the share becomes less tradable and out of the reach of many investors, and a split brings it back into a popular range, making the share affordable to small investors and widening the shareholder base. Its limitations are the cost of carrying it out and the attraction of a low price to speculators and short-term traders.

Link with dividend policy. The dividend decision includes the form of the dividend, cash or bonus shares, and a cash dividend affects the firm's cash flow position. A split, by contrast, distributes nothing: as its meaning above shows, it changes only the number and face value of the shares.

Where the 2 marks sit

#	Component	Marks
1	Meaning and effect on capital and holdings	1
2	Purpose, advantages and limitations	1
	Total	2

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