SIE (Securities Industry Essentials) Practice Exam

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What effect does a stock split have?

Increases the dividend yield
Lowers the company's market capitalization
The price per share of common stock decreases
Increases the total number of shares without changing the share price

The correct answer is: The price per share of common stock decreases

A stock split is a corporate action in which a company divides its existing shares into multiple shares. This does not change the value of the company or the total shareholders' equity, but it does change the number of outstanding shares. As a result, the price per share of common stock decreases because the market capitalization of the company remains the same but is now divided between a larger number of shares. Option A is incorrect because a stock split does not directly affect the dividend yield, which is determined by the company's profitability. Option B is incorrect because a stock split does not change the market capitalization of the company. Option D is incorrect because a stock split changes the number of shares but does not affect the stock price, so the total value of shares also remains the same.