Question

Background Information: Cipper Corporation is authorized to issue an unlimited number of no par value common shares, and has 100 000 shares outstanding. The business has the following balances in its shareholders' equity accounts:

Cipper Corporation Shareholders' Equity
Common Shares	$300 000
Retained Earnings	120 000
Total Equity	$420 000

As you can see, the company has enough in its Retained Earnings account to declare a dividend. The board of directors has decided to either pay a $1 per share cash dividend or issue one share for every four shares each shareholder owns. The current market price is $4 per share.

Value of Cash Dividend: 100 000 outstanding shares x $1 = $100 000

Value of Stock Dividend: 100 000 / 4 = 25 000 shares @ $4 each = $100 000

What effect does each scenario have on total shareholders' equity?

Cipper Corporation Shareholders' Equity	Before Dividend	Cash Dividend	Stock Dividend
Common Shares	$300 000	$300 000	$300 000
Retained Earnings	120 000	20 000	120 000
Total Equity	$420 000	$320 000	$420 000
Book Value per share (Equity/# shares)	$4.20	$3.20	$3.36

Required: Assume that you own 800 shares in Cipper Corporation. Calculate the dividend you would receive from a cash dividend and from a stock dividend. As a shareholder, which would you prefer? Explain why in as much detail as possible.

Answer 1