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NISM Certifications · NISM-Series-XV: Research Analyst · Corporate Actions

A company's board announces a stock split reducing the face value of its equity shares from Rs 10 to Rs 2. Which of the following is the direct result of this action, other things being equal?

A split from Rs 10 to Rs 2 face value multiplies the share count five times. Paid-up capital, reserves and total market capitalisation stay unchanged, while the price per share falls to roughly one-fifth. A split changes only the number of shares and the face value, not the company's value.

  1. AThe number of shares outstanding rises five-fold and the market capitalisation stays unchangedCorrect
  2. BThe number of shares outstanding stays the same and the reserves fall
  3. CThe number of shares outstanding rises five-fold and the market capitalisation rises five-fold
  4. DThe paid-up capital rises five-fold

Explanation

A split from Rs 10 to Rs 2 face value gives 10/2 = 5 shares for each one held. Paid-up capital and reserves do not change, so the total market capitalisation is unchanged and the price per share falls to about one-fifth. The option showing market cap rising five-fold wrongly treats a split as value creation.

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