STOCK SPLIT

Stock Split is a corporate action in which a company divides its existing shares into multiple shares to boost
the liquidity of the shares.
 The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two
or three shares, respectively, for every share held.
 Basically, companies choose to split their shares so they can lower the trading price of their stock to
a range deemed comfortable by most investors and increase liquidity of shares.
 For example, 100 shares of P10 stock as opposed to 10 shares of P100 stock. Thus, when a
company’s share price has risen substantially, most public firms will end up declaring a stock split at
some point to reduce the price to a more popular trading price.
 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.
 When a stock split is implemented, the price of shares adjust automatically in the market. A company’s
board of directors make the decision to split the stock into any number of ways.
Reasons for a Stock Split
 A split is usually undertaken when the stock price is quite high, making it pricey for investors to acquire
a standard board lot of 100 shares. For example, Apple Inc. issued a 7-for-1 stock split in 2019 after
its share price had climbed to almost $700 per share. The board of directors figured that the price
was too high for the average retail investor and implemented the stock split to make the shares more
accessible to a wider set of potential shareholders. The stock price closed at $645 the day before the
split was activated. At market open, Apple's shares were trading at approximately $92, the adjusted
price after the 7-for-1 stock split.
 The higher number of shares outstanding can result in greater liquidity for the stock, which facilitates
trading and may narrow the bid-ask spread. Increasing the liquidity of a stock makes trading in the
stock easier for buyers and sellers. Liquidity provides a high degree of flexibility in which investors can
buy and sell shares in the company without making too great an impact on the share price.
 While a split in theory should have no effect on a stock's price, it often results in renewed investor
interest, which can have a positive impact on the stock price. While this effect can be temporary, the
fact remains that stock splits by companies are a great way for the average investor to accumulate an
increasing number of shares in these companies. Many of the best companies routinely exceed the
price level at which they had previously split their stock, causing them to undergo a stock split yet
again.
Example of Stock Split
On December 2019, BB Company, split its shares 7-for-1 to make it more accessible to a larger number of
investors. Right before the split, each share was trading at $645.57. After the split, the price per share at
market open was $92.70, which is approximately 645.57 ÷ 7. Existing shareholders were also given six
additional shares for each share owned, so an investor who owned 1,000 shares of pre-split would have 7,000
shares post-split. BB Company's outstanding shares increased from 861 million to 6 billion shares, however,
the market cap remained largely unchanged at $556 billion. The day after the stock split, the price had
increased to a high of $95.05 to reflect the increased demand from the lower stock price.

Reverse Stock Split is the opposite transaction, where a company divides, instead of multiplies the number of
shares that stockholders own, raising the market price accordingly.
 A company that issues a reverse stock split decreases the number of its outstanding shares and
increases the share price. Like a forward stock split, the market value of the company after a reverse
stock split would remain the same.

Submitted by: PRINCE JOSEPH SOLANO 24/02/2020 3:46 PM

  A company that takes this corporate action might do so if its share price had decreased to a level at
which it runs the risk of being delisted from an exchange for not meeting the minimum price required
to be listed.
 A company might also reverse split its stock to make it more appealing to investors who may perceive
it as more valuable if it had a higher stock price.

A reverse/forward stock split is a special stock split strategy used by companies to eliminate shareholders
that hold fewer, than a certain number of shares of that company's stock. A reverse/forward stock split uses
a reverse stock split followed by a forward stock split. The reverse split reduces the overall number of shares
a shareholder owns, causing some shareholders who hold less than the minimum required by the split to be
cashed out. The forward stock split increases the overall number of shares a shareholder owns.

SHARE REPURCHASE
Share Repurchase is a transaction whereby a company buys back its own shares from the marketplace.
 A company might buy back its shares because management considers them undervalued.
 The company buys shares directly from the market or offers its shareholders the option of tendering
their shares directly to the company at a fixed price.
 A share buyback reduces the number of outstanding shares, which increases both the demand for the
shares and the price.
 Share repurchase reduces the number of shares outstanding, it increases earnings per share (EPS).
A higher EPS elevates the market value of the remaining shares. After repurchase, the shares are
canceled or held as treasury shares, so they are no longer held publicly and are not outstanding.
Reason for Share Repurchase

A share repurchase reduces the total assets of the business so that its return on assets, return on equity and
other metrics improve when compared to not repurchasing shares. Reducing the number of shares means
earnings per share (EPS), revenue and cash flow grow more quickly.

If the business pays out the same amount of total money to shareholders annually in dividends and the total
number of shares decreases, each shareholder receives a larger annual dividend. If the corporation grows its
earnings and its total dividend payout, decreasing the total number of shares further increases the dividend
growth. Shareholders expect a corporation paying regular dividends will continue doing so.

In some cases, a buyback can hide a slightly declining net income. If the share repurchase reduces the shares
outstanding to a greater extent than the fall in net income, the EPS will rise irrespective of the financial state
of the business.

Share repurchases fill the gap between excess capital and dividends so that the business returns more to
shareholders without locking into a pattern. For example, assume the corporation wants to return 75% of its
earnings to shareholders and keep its dividend payout ratio at 50%. The company returns the other 25% in
the form of share repurchases to complement the dividend.

Benefits of a Share Repurchase

A share repurchase shows that the corporation believes its shares are undervalued and is an efficient method
of putting money back in shareholders’ pockets. The share repurchase reduces the number of existing shares,
making each worth a greater percentage of the corporation. The stock’s EPS increases while the price-to-
earnings ratio (P/E) decreases or the stock price increases. A share repurchase demonstrates to investors
that the business has sufficient cash set aside for emergencies and a low probability of economic troubles.
Advantages. Share repurchases effectively convert dividend income into capital gains income. Shareholders
in high (marginal) income tax brackets may prefer capital gains income because of the ability to defer taxes
Submitted by: PRINCE JOSEPH SOLANO 24/02/2020 3:46 PM
into the future (when the stock is sold). Also, share repurchases provide the firm with greater financial flexibility
in timing the payment of returns to shareholders. Finally, share repurchases can represent a signal to investors
that the company expects to have higher earnings and cash flows in the future.

Disadvantages. A company may overpay for the stock that it repurchases. If the stock price declines, the share
repurchase represents an unprofitable use of the company’s resources. Also, a share repurchase may trigger
IRS scrutiny (and possible tax penalties) if the buyback is viewed as a way for shareholders to avoid taxes on
cash dividends. Finally, some current shareholders may be unaware of the share repurchase program and
may sell their shares before the expected benefits (i.e., price appreciation) occur.

Submitted by: PRINCE JOSEPH SOLANO 24/02/2020 3:46 PM