stock that pay dividend

							                  Financial Decisions



              10 Stock Distributions

1.   Stock Dividends
2.   Stock Splits



Instructor: A. Ashta


References:     Ross, Westerfield & Jordan: Ch. 14
                Emery, Finnerty & Stowe: Ch. 17
                Shapiro & Balbirer: Ch. 15
                                                     1
               Stock Dividends and Stock
                         Splits
•   Stock Dividends (expressed as percentage)
         • Payment of additional shares to common stockholders. A
            10% stock dividend means that shareholders get 1
            additional share for every 10 they own.
•   Stock Splits (expressed as ratio)
         • A proportionate increase in the number of common shares.
            A 2:1 stock split means that stockholders will receive one
            additional share for every one they own.
•   In both cases, share value is diluted but total equity remains
    the same
•   NYSE:         <25% = stock dividend
               >, = 25% = stock split
                                                                     2
                    Stock Dividends


• A stock dividend proportionately increases
  the number of shares each shareholder
  owns.
• A 10% stock dividend:
  – Increases total number of shares outstanding
    by 10%.
  – Increases each shareholders holdings by
    10%.
     • If a shareholder own 50 shares before the
       dividend, she owns 55 shares after the stock
                                                      3
       dividend is paid.
                   Stock Dividends


• For a “small” stock dividend, the fair
  market value of these new shares is
  transferred from retained earnings to:
  – Paid-in-capital and
  – Capital contributed in excess of par value.
• Total common stockholder’s equity
  remains unchanged.
• Par value of each share remains
  unchanged
                                                  4
                         Stock Splits


• The total number of shares outstanding
  increases.
     • In a 3-for-2 stock split, 3 new shares are issued for
       every 2 pre-split shares outstanding.
     • Thus, there is a 50% increase in the number of
       shares outstanding.
• A stock split alters the par value of the
  shares
• But there is no transfer of balances
  between the equity accounts(no transfer                  5
  from reserves to share capital).
            Financial Impact of Stock
                  Distributions

• Apart from any informational effects, the
  total market value of the stock remains
  unchanged after a stock dividend or a
  stock split.
• Since the number of shares outstanding
  increases in either case, the per-share
  price will drop correspondingly.


                                              6
         Example of Stock Distributions


• Assume the share price is $45 before the
  stock distribution.

• After a 3-for-2 stock split, the share price
  will be ___________

• After a 10% stock dividend, the share
  price would be __________
                                                 7
Accounting Treatment of Stock
  Dividends and Stock Splits


• A. Before:

  Common ($1 par; 1         $1M
  million shares)
  Add. paid in capital        9M
  Retained earnings         100M
     Total equity          $110M

  Market price per share     $50



                                   8
   Accounting Treatment of Stock
     Dividends and Stock Splits

• A. After 3:2 Stock split:
•

  Common ($___ par; $__M
  ___ million shares)
  Add. paid in capital____M
  Retained earnings____M
    Total equity $____M

  Market price per share$___ x ____=$


                                        9
      Accounting Treatment of Splits
          and Stock Dividends

• B. “Small” stock dividend (10%)
   – ________ new shares at $____ each = $____M, so


  Common ($1 par; 1.1     $1.1M
  million shares)
  Add. paid in capital    ___M
  Retained earnings       ___M
     Total equity        $110M

  Market price per share $____



                                                      10
                  Try Ross Q. 10
                  Stock Dividend

• 8% stock dividend declared
• Market price is $ 10

• Equity:
  – Common Stock ($ 1 par)       450,000
  – Capital Surplus            1,550,000
  – Retained Earnings          3,000,000
  – Total                      5,000,000
                                           11
                     Answer: Ross Q. 10


Dividend = _____________________ shares
                  =      $____________
Total shares outstanding = _______________________ shares
   4              =      $____________
Capital surplus for new shares = ________________
Retained earnings = ________________________

Common stock ($1 par value)         $ ___________
Capital surplus                     ________________
Retained earnings                   ________________
                                    $ _______________

                                                            12
                       Q. 11 of Ross
                        Stock Split

• IF 5 for 1 stock split, what happens to
  equity accounts
       – Equity:
          » Common Stock ($ 1 par)     450,000
          » Capital Surplus          1,550,000
          » Retained Earnings        3,000,000
          » Total                    5,000,000

• If cash dividend of 50 cents per new share
  represents a 10% increase on last year’s
  dividend, what was last year’s dividend?
                                                 13
• ___________________


•   Dividends this year
                  = $0.50 x __________ shares = $____________
•   Last year’s dividend
                  = $____________/_____ = $__________________
•   Dividends per share last year
                  = $_______________/_______ shares = $________



                                                                  14
        Do Stock Distributions matter?

• Do they matter?
    •   “Popular trading range” argument
    •   Liquidity/ownership base
    •   Cosmetic effects
    •   Information effects


• How about reverse splits?
    •   The trading range argument again
    •   Can we “buy respectability”?
    •   Minimum price requirements
    •   Facilitating buyouts
                                           15
        Reasons for Stock Dividends
             and Stock Splits
•   Keep share in “popular” trading range in order to
    appeal to small investors. ($10 to $30)
        • This may broaden ownership of firm

        • Allows investors to buy in normal lots rather than odd
          lots (more expensive)

•   Stock dividends conserve cash                 while    still
    maintaining a record of dividends.

•   Signals management’s confidence in the future.
        • Have to pay more dividends

•    However, increases in stock price will be
    transitory unless management delivers results. 16
              Financial Impact of Stock
                    Distributions

• After a stock dividend,
     • the per-share cash dividend is usually unchanged.

• After a stock split,
     • the cash dividend is either unchanged or reduced
       less than proportionately.

• In both cases,
     • the cash dividend per original share increases.
     • positive signal about firm value.

                                                          17
           No Shareholder Value Added


• Stock distributions are paper transactions

• No shareholder value is added by paper
  changes

• In fact, shareholder value is destroyed
     • Extra printing cost

     • More brokerage fees on low value shares

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