Corporations split stocks to control the stock price when the stock price increases too rapidly. A stock split gives existing owners additional stock based on the new stock-splitting ratio. Splitting stocks does not change the amount of value that the individual stockholder owns. In addition, the stockholder's equity section of the corporation's balance sheet does not change. The only changes that occur are an increase in outstanding shares and a proportional decrease in par value.
Divide the ratio to put it in terms of one stock. For example, there is a 3:2 stock split; therefore, it equals 3 / 2, or 1.5.
Multiply the factor determined in Step 1 by the current number of shares outstanding. For example, if there are 100,000 outstanding shares, you multiply that by 1.5: 100,000 x 1.5 = 150,000. This is the number of shares outstanding after the split.
Divide the par value by the factor determined in Step 1. For example, if the par value is $15, divide $15 by 1.5: 15 / 1.5 = 10. The new par value of the stock is $10.
- Photo Credit balance sheet image by Darko Draskovic from Fotolia.com
- What Does the Term Market Cap Mean?
How to Value Common Stock
A company’s common stock is only worth what investors are willing to pay, so the market price on any given day is...
How Often Do Stocks Split?
Stock splits are a type of corporate "event" in which the company's board of directors agree to declare an increase -- or...