A stock split:
A) increases the debt to equity ratio.
B) decreases the debt to equity ratio.
C) decreases the size of the firm.
D) decreases future earnings per share.

Question

Quizplus · Accepted Answer

A stock dividend is a transfer of equity from retained earnings to paid-in capital. The debit is to retained earnings, and the credits are to common stock and additional paid-in capital. More shares are outstanding following the stock dividend, but every shareholder maintains the same percentage of ownership. In effect, a stock dividend divides the pie (the corporation) into more pieces, but the pie is still the same size. Hence, a corporation will have a lower EPS and a lower carrying amount per share following a stock dividend, but every shareholder will be just as well off as previously.

A Stock Split