Question asked if this statement is right or wrong: “One practical concern with stock split is that it will reduce the firm’s price-to-earnings ratio” The correct is that it’s wrong. Reasoning: A stock split will reduce the price and earnings per share proportionately, leaving the price-to-earnings ratio the same. ------------- How does the stock split after the earnings portion of the P/E equation? My answer was that the P/E will reduce as a result of a stock split because the stock price will decrease and earnings will be unaffected.
You say earnings will be unaffected, yet surely this is earnings per share as a component of p/e ratio? Therefore as stock split will result in more shares the price and earnings per share would both be reduced.
^ agreed.
Thanks! I got it.