Part 2/7:
To further elucidate how stock splits function, Lewis outlines a straightforward example involving a hypothetical company worth $1 million, divided into 10,000 shares, each valued at $100. Fast-forward to a point where the business grows to a valuation of $10 million; here, the share price would rise to $1,000 each.
Management's concern about the high cost of entry for potential investors may motivate the decision to implement a stock split. By executing a five-for-one split, the company increases the share count to 50,000 while reducing the share price to $200. Importantly, the total value of the company and the shareholders’ value remains unchanged.