Unformatted text preview: prestock split value. b. The stock market often views the declaration of a stock split as a positive signal about the corporation. For
example, the market often perceives a stock split as a signal from management that they believe that they
can maintain the price of the stock despite the stock split. In addition, some companies increase their
dividend per share soon after splitting their stock. Such positive signals, in turn, increase demand for the company's stock, which drives up the price of the stock. In addition, stock splits would be expected to
cause the market price per share to drop once the stock split actually takes place to reflect the additional
shares of stock outstanding. The lower market price would make the stock more affordable to more
investors, which should increase demand for the stock and drive up the price.
c. Theoretically, the value of a company's stock equals the present value of the cash flows the stock market
expects an investor to generate from an equity investm...
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