 In this discussion, we will discuss the discussion question of describe a stock split. So if we see a discussion question like this, we may first want to just describe what type of business entity would have a stock split and then go into what it is and then why we would want a stock split to have a detailed answer to an essay question such as this. So clearly when we talk about a stock split, the idea that we have stock would mean that we're probably talking or we are talking about a corporation as opposed to a partnership or a sole proprietor. So what is a stock split going to be? That would mean that the board of directors and management have decided to basically split the stock in some type of fashion, meaning for every stock out there we're going to give some number above that one stock to the owners of the stock. In other words, we could say a two-for-one stock split or a three-for-one stock split. If we had a two-for-one stock split, it would in essence mean that once the stock split takes place, if I then owned one stock, I would then get two stocks. I would then automatically have two stocks. If I had two stocks to start with, I would then have four stocks. It would split. Now when we think about the stock split, we might think, well, why would we do that? That seems kind of odd if there are any bad consequences to that. Is there any kind of manipulation happening here? What is going on with a stock split? Note that one of the primary reasons we might do a stock split is just to lower the price of the outstanding stocks. Because if we're a company and we sell our stocks and we start doing well, then our stock price and we have the same amount of stocks out there. We have 100 stocks out there and then we start doing well, then our value is going to go up and those 100 stocks are going to stay the same. Therefore, the price of those stocks will increase. And we may want to say, hey, I want to have the stocks to be affordable to people and I'd rather have them in the best price zone so that people can then purchase the stocks and that might be one reason that we'd have something like a stock split. And you might think, well, wouldn't that manipulate things? Isn't that kind of a tricky thing? What does that do to ownership? But note that it shouldn't change anything in terms of the ownership because say we own 10% of the stock now. Say we have 10 shares and that's 10% of the stock and then there's a stock split and we have 20 shares of now 200 stocks. So that would still be 10%. So that would mean that our percentage ownership after the stock split remains the same and therefore it doesn't change our voting power, which is something that's clearly what we're concerned about. It doesn't change the voting power there. All that happens is now we have 20 shares, which is still 10% of the voting stock. In terms of an equity section on the balance sheet, it really doesn't change anything in terms of the numbers on the balance sheet, meaning there's no distribution from retained earnings. If it was a stock dividend, then retained earnings would differ. Here, there's nothing really happening to retained earnings. We're not distributing anything from retained earnings. Retained earnings is going to remain the same. That's going to be one of the major differences between a stock split and a stock dividend. The common stock that's on there, which is which is how much we sold and the additional paid in capital, which represents how many stocks we sold, will also remain the same. You might think, well that seems kind of funny because how would that happen? Because the common stock is on the books as multiplying the number of shares out there times the par value, the number of shares times the par value. But what we're going to do in a stock split is we're going to say the number of shares have doubled and then the par value will be cut in half. So the only difference on the balance sheet, the number is going to be the same for common stock, but the description of how to get that number will change, meaning we're going to have twice the number of shares, but there'll be what there'll be valued at half the par value. Now remember that the par value and the financial statements is different than the market value. The market value of the stock is not on the financial statements, that's what it's being traded for. You would think it would be correlated of course to the value of the company, which would be represented by the financial statements, but on the financial statements we have the equity section broken out between the amount invested, which is going to be a common stock invested and the additional paid in capital, and then the retained earnings, the accumulation of revenue over time, less anything that's been distributed in the form of dividends. Nothing here is being distributed, retained earnings is not being affected, and we're not changing even the stock because we're not really distributing any more stock. What we're doing is kind of cutting the stock value in half and saying everybody has twice as many stocks, but it's worth half as much. Not really on a market value, but on a par value as far as the financial statements go, because that's all we have control over in terms of reporting. Now then you think well why would we do it? We are probably trying to affect the market price, but again we're not reporting the market price on our financial statements. What would happen to the market price? Well you would think that nothing has changed here. If we just say that there's a hundred shares now and now there's 200 shares, everybody that had a share now has 200 shares. We don't have control over what the market will do with that, but you would think, given the fact that we haven't added any more value to the corporation, we haven't done any changes, the equity section is still the same, the financials are still completely the same, except that we cut the par value in half and said now there's twice as many stock, because of that you would think that the market price would be cut in half. It would almost surely go down because there's twice as many stocks out there. Just supply and demand would say okay nothing's changed on the financials. Now there's twice as many stocks out there, you would think the market price would then be cut in half. That's what we would suspect would happen, but again the market could change in different ways. They might say hey the price is now in a reasonable zone, maybe that makes it more valuable to people that would be willing to purchase it and maybe that means the price doesn't go exactly in half. Maybe it goes a little bit higher than in half or something like that. So the market price again, we don't know exactly what that is. It's not reported on the financial statement, but that's probably part of the goal of the stock split to bring the market price to what is thought to be the optimal market price for a particular stock.