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    Question

    Which of the following is a corporate action of breaking

    the existing shares of a particular face value into smaller denominations? 
    A Bonus issue Correct Answer Incorrect Answer
    B Buy back Correct Answer Incorrect Answer
    C Right Issue Correct Answer Incorrect Answer
    D Stock Split Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    Stock Split : A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. Although the number of shares outstanding increases by a specific multiple, the total value of the shares remains the same compared to pre-split amounts, because the split does not add any real value. Reasons of stock splits:       I.        The company liquidity: With each share’s price dropping a certain percentage – depending on the ratio that the company decides to use – investors tend to see the company’s stock as more affordable, and therefore may be more likely to buy shares. The lower the share price, the less risky the stock seems.     II.        A stock split makes the stock more affordable for more investors and thus can be used to draw in new investors who may have been reluctant or simply unable to purchase the stock at its higher, pre-split price. The move is a useful strategy when a company’s stock price rises to a level that prices many investors out, or when the price has risen significantly higher than its competitors’ stock.

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