In: Finance
Determine whether you would prefer to see the company that you researched declare a 100% stock dividend or declare a 2-for-1 split. Provide support for your answer with one (1) real-world example of your preference.
Solution:
Let us first have a look at 100% stock dividend scenario:
Stock dividend is the issuance of additional shares by a company to the sharholders on proportional basis. So if a shareholder has 100 shares of company ABC, after stock dividend he would have 200 shares of ABC. Though the number of shares has increased, their holding value would remain same.
Let us look at 2:1 Stock Split scenario:
Stock split, as the name says, would increase the number of shares, keeping the value same.
Suppose shareholder has 100 shares of ABC of face value of $10, after stock split (2:1), he would have 200 shares of $5 each.
Both stock dividend and stock split are non-cash. It is basically done to provide liquidity of the stock. By doing so, the shareprice of the company comes down and people can afford buying them. Thus liquidity of the share increases. Both are advantageous to the shareholders.
One real life example could be Walmart Inc. After IPO in 1969 they have given 11 times stock splits (2:1) and have been regularly providing cash dividends. So shraeholder who had 10 shares of Walmart in 1969 would have 20480 shares now. Basically, stock dividend and stock split are good indicators and advantageous for long term investors.