Question

1)    What is the primary financial measurement that increases shareholder value?

2)    Who authorizes a dividend and determines the amount and when it is paid?

3)    What are the different types of dividends?

4)    What are the three "dates" that are important for accounting for dividends?

5)    What dividend date will not cause an accounting transaction?

6)    Does a stock dividend affect Retained Earnings?   Does it decrease overall equity?

7)   What are the two conditions that may exist that could effect how a stock dividend is valued? What are these differences?

Answer 1

Answer 1

Shareholder value is the financial worth owners of a business receive for owning shares in the company. An increase in shareholder value is created when a company earns a return on invested capital (ROIC) that is greater than its weighted average cost of capital (WACC). In other Words, value is created for shareholders when the business performs Efficiently & Better than they expect it to.

In order to Increase shareholder value, there are three mainly strategies for Increase profitability in a company:

(1) Revenue growth,

(2) Operating margin,

(3) Capital efficiency

         We will discuss in the following sections the major factors in boosting each       of the three measures.

• Revenue Growth

For any goods and services businesses, sales revenue can be improved through the strategies of sales volume increase or sales price inflation.

Increasing Sales Volume

A company would want to retain its current customers and keep them away from competitors to maintain its market share. It should also attract new customers through referrals from existing customers, marketing and promotions, new products and services offerings, and new revenue streams.

Raising Sales Price

A company may increase current product prices as a one-time strategy or gradual price increases throughout several months, quarters, or years to achieve revenue growth. It can also offer new products of advanced qualities and features and price them at higher ranges.

Ideally, a business can combine both higher volume and higher prices to significantly increase revenue.

• Operating Margin

Besides maximizing sales, a business must identify feasible approaches to cost reductions leading to optimal operating margins. While a company should strive to reduce all its expenses, COGS (Cost of Goods Sold) and SG&A (Selling, General, and Administrative) expenses are usually the largest categories that need to be efficiently managed and minimized.

• Capital Efficiency

Capital efficiency is the ratio between dollar expenses incurred by a company and dollars that are spent to make a product or service, which can be referred to as ROCE (Return on Capital Employed) or the ratio between EBIT (Earnings Before Interest and Tax) over Capital Employed. Capital efficiency reflects how efficiently a company is deploying its cash in its operation. Capital employed is the total amount of capital a company uses to generate profit, which can be simplified as total assets minus current liabilities. A higher ROCE indicates a more efficient use of capital to generate shareholder value, and it should be higher than the company’s capital cost.

Answer 2

When Companies Decide to pay out a portion of its profits to the shareholders then such portion of profit Is known as Dividend. Paying Dividend are a way to provide shareholders with a return on their investment that they Employed in the company. The Board of Directors issues a declaration stating that they decide to pay out the dividend how much will be paid out and over what timeframe. This declaration implies a liability for the dividend payments.

Answer 3

There are several types of dividends, some of which do not involve the payment of cash to shareholders. These dividend types are:

(1) Cash Dividend

(2) Stock Dividend

(3) Property Dividend

(4) Scrip Dividend

(5) Liquidating Dividend

Now We Discussing All types of dividend in brief as follows:

· Cash dividend.

The cash dividend is the most common of the dividend types used. On the date of declaration, the board of directors resolves to pay a certain dividend amount in cash to those investors holding the company's stock on a specific date. The date of record is the date on which dividends are assigned to the holders of the company's stock. On the date of payment, the company issues dividend payments.

· Stock Dividend:

A stock dividend is the issuance by a company of its common stock to its common shareholders without any consideration. If the company issues less than 25 percent of the total number of previously outstanding shares, then treat the transaction as a stock dividend. If the transaction is for a greater proportion of the previously outstanding shares, then treat the transaction as a stock split

· Property Dividend:

A company may issue a non-monetary dividend to investors, rather than making a cash or stock payment. Record this distribution at the fair market value of the assets distributed. Since the fair market value is likely to vary somewhat from the book value of the assets, the company will likely record the variance as a gain or loss. This accounting rule can sometimes lead a business to deliberately issue property dividends in order to alter their taxable and/or reported income.

· Scrip Dividend:

A company may not have sufficient funds to issue dividends in the near future, so instead it issues a scrip dividend, which is essentially a promissory note (which may or may not include interest) to pay shareholders at a later date. This dividend creates a note payable.

· Liquidating Dividend:

When the board of directors wishes to return the capital originally contributed by shareholders as a dividend, it is called a liquidating dividend, and may be a precursor to shutting down the business. The accounting for a liquidating dividend is similar to the entries for a cash dividend, except that the funds are considered to come from the additional paid-in capital account.

Answer 4

The Three Dates of Dividend Important for Accounting Purpose are:

(1) Declaration Date

(2) Ex-Dividend Date

(3) Payment Date

A Brief discussion of the above dates are as follows:

· Declaration Date:

The Declaration date is also referred to as the announcement date since a company notifies shareholders and the rest of the market. The declaration date is the date on which a company officially commits to the payment of a dividend.

· Ex-Dividend Date:

The date on which a stock begins trading without the dividend. To receive the declared dividend, shareholders must own the stock prior to the ex-dividend date.

· Payment Date:

The date the company sends out dividend payments to shareholders. The payment date typically occurs a week or two after the date of record.

Answer 5

Record Date: The Record Date occurs three business days after the ex-dividend date and is the date on which a company officially determines the shareholders of record, those who owned the stock prior to the ex-dividend date, who are eligible to receive the dividend payment. No Accounting Entries are necessary at this date.