Question

Please cite your answer. The answer must be different from the other posts. Thank you.

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

a) Generally a company has two choices for dividend, either to declare cash dividend or stock dividend. And In the question the company is declaring 50% stock dividend which means that company is giving additional shares to the existing shareholders as dividend. Dividend percentage is 50% which means that the company is declaring half the number of existing shares. For example if the company have 1,000 shares and is declaring 50% stock dividend, then the company is issuing 500 new shares to existing shareholders of the company. The total amount in this case would be 1,500 shares after the dividend declaration.

b) According to the question the person will get free shares as the company is declaring stock dividend. However, further he is free to sell the shares afterwards.

c) I would prefer stock dividend as I would invest in the company wisely by seeing its growth potential and many more. And I would be happy to have more of its share for free as dividend.