Question

Smoky Joe’s, Inc., a rapidly growing chain of BBQ restaurants, has had considerable increases in the value of their common stock over the years. Normally, the Board of Directors declares a modest cash dividend. But this year, they decided to issue a 50% stock dividend. Your friend, a new investor that saw potential in the company early on, came to you excited about the news, saying that he is getting free stock and that this is much better than the cash dividends from last year. Using what you have learned in accounting thus far, respond to your friend’s statement including the following points:

1. What does a 50% stock dividend really mean?
2. Is your friend really getting “free stock”?
3. Which would you prefer, a cash dividend or a stock dividend?

Answer 1

• Stock dividend means company is issuing additional shares to its existing shareholder in lieu of cash diviend.
• Companies are using this option when companay is low on liquid cash on hand.
• 50% stock dividend means, comapny will issue 50% of existing issued shares in form of stock dividedn without any consideration to capitalize reserve balance.
• Here, Shareholders will get 50% of existing shareholding as extra shares at no cost.

• Here, company is not taking any consideration for issuing extra shares in cash form. But shareholders will not get any extra benefit at present due to change in market capitalization of a company with a issuance of more share in form of stock dividend.
• Please note that, total market capitalization of the company will not change and market price per share will reduce. so,shareholder will not get present benefit as like he would get in cash form.
• So, here shareholders are not getting free stock.

• As per above explanation, cash dividend is preferable for shareholders.