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Stock Dividends
and Stock Splits
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Stock Dividends Stock Dividend -- A payment of additional shares
of stocshareholders. Often used in place of or in addition to a
cdividend.
Small-percentage stock dividends / Small Share Dividends
Typically less than 20%-25% of previously outstanding c
stock. Assume a company with 400,000 shares of $5 par commo
outstanding pays a 5% stock dividend. The pre-dividend value is
$40. How does this impact the shareholdaccounts?
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B/S Changes for the Small-PercentageStock Dividends
$800,000 ($40 x 20,000 new shares) transferrepaper) out of
retained earnings.
$100,000 transferred into common stock acco
$700,000 ($800,000 - $100,000) transferredadditional
paid-in-capital. Total shareholders equity remains unchange
million.
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Small-Percentage Stock Dividends Before 5% Stock Dividend
Common stock($5 par; 400,000 shares ) $ 2,000,000
Additional paid-in capital 1,000,000Retained earnings
7,000,000
Total shareholders equity $10,000,000
After 5% Stock Dividend Common stock
($5 par; 420,000 shares ) $ 2,100,000 Additional paid-in capital
1,700,000Retained earnings 6,200,000
Total shareholders equity $10,000,000
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Pre-stock Dividend Price
Pre-stock dividend price =
+
= $+ .
= $38.10
The market price of each share of stock should declinein
proportion to the number of new shares issued.
This relationship can be expressed as follows:
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Pre-stock Dividend Price
Prior to dividend, the stockholders wealth:100 shares x $40 per
share = $4,000
After:105 shares x $38.10 per share = $4,000
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Stock Dividends, EPS, and Total Earnings
After a small-percentage stock dividend, what happensto EPS and
total earnings of individual investors?
Assume that investor SP owns 10,000 shares and the firm earneper
share.
Total earnings = $2.50 x 10,000 = $25,000. After the 5%
dividend, investor SP owns 10,500 shares and t
proportionate earnings of $25,000. EPS is then reduced to $2.38
per share because of the stock
($25,000 / 10,500 shares = $2.38 EPS).
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Large-Percentage Stock Dividend
Typically 20%-25% or greater of previously outstandincommon
stock.
The material effect on the market price per share causethe
transaction to be accounted for differenReclassification is limited
to the par value of additionshares rather than pre-stock-dividend
value additional shares.
Assume a company with 400,000 shares of $5 common stock
outstanding pays a 100% stock dividen
The pre-stock-dividend market value per share is $4
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B/S Changes for the Large-PercentageStock Dividends
$2 million ($5 x 400,000 new shtransferred (on paper) out of
rearnings.
$2 million transferred into costock account.
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Large-Percentage Stock Dividends Before 100% Stock Dividend
Common stock($5 par; 400,000 shares ) $ 2,000,000 Additional
paid-in capital 1,000,000Retained earnings 7,000,000
Total shareholders equity $10,000,000
After 100% Stock Dividend Common stock
($5 par; 800,000 shares ) $ 4,000,000 Additional paid-in capital
1,000,000Retained earnings 5,000,000
Total shareholders equity $10,000,000
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Reasons why firms declare stock dividends
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Stock Splits
Stock Split -- An increase in the number of shares outstandingby
reducing the par value of the stock.
Similar economic consequences as a 100% stock dividend.
Primarily used to move the stock into a more popular tradinrange
and increase share demand. Assume a company with 400,000 shares of
$5 par common
stock splits 2-for-1. How does this impact the
shareholdersequity accounts?
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Stock Splits Before 2-for-1 Stock Split
Common stock($5 par; 400,000 shares ) $ 2,000,000 Additional
paid-in capital 1,000,000Retained earnings 7,000,000
Total shareholders equity $10,000,000
After 2-for-1 Stock Split Common stock
($2.50 par; 800,000 shares ) $ 2,000,000 Additional paid-in
capital 1,000,000Retained earnings 7,000,000
Total shareholders equity $10,000,000
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The board of directors of Complex Computers has decided
todeclare a 20 percent stock dividend. The companysstockholders
equity is as follows:
Common stock ($1 par, 100,000 shares) $ 100,000
Contributed capital in excess of par 900,000
Retained earnings 5,000,000Total common stockholders equity $
6,000,000
Pre-Stock DividendCommon Stockholders Equity
Problem
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The common stock of Complex Computers is
currently trading at $80 a share.The company is growing rapidly
and has neverpaid a cash dividend.a. Show the companys common
stockholders
equity after the stock dividend.b. Calculate the post-stock
dividend price of
Complex Computers stock, assuming noother changes occur.
Problem
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a.
Answer Before 20% Stock Dividend
Common stock($1 par; 100,000 shares ) $ 100,000
Additional paid-in capital 900,000Retained earnings
5,000,000
Total shareholders equity $ 6,000,000
After 20% Stock DividendPost- Stock Dividend Common Stockholders
Equity Common stock
($1 par; 120,000 shares ) $ 120,000 Additional paid-in capital
2,480,000Retained earnings 3,400,000
Total shareholders equity $ 6,000,000
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b.
Answer
Pre-stock dividend price = +
=$+ .
= $66.67
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THE END
