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Following a 4-for-1 stock split on 10,000 shares with a $20 market price, what happens to the total market capitalisation of the shares outstanding?
AIt increases to $200,000 only after a journal entry
BIt increases to $800,000
CIt falls to $50,000
DIt stays at $200,000
Answer & Solution
Correct answer: D. It stays at $200,000
1. Before split: capitalisation = $10{,}000 \times \$20 = \$200{,}000$.
2. After split: shares = 40,000 and market price = $\$20 \div 4 = \$5$.
3. After split: $40{,}000 \times \$5 = \$200{,}000$.
4. The total value is unchanged, and no journal entry is required for a split.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §6.8 "Stock Splits", p.257_
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