Question

You are a consultant of THEIR COMPANY hired in December 2017. You advise them to consider declaration a stock split of 2-for-1 instead of cash dividend 10%. However, THEIR COMPANY’s BOD is not familiar with stock split and they want to know what would be the effect of your advice to its Financial Statement. The following data are excerpts from its financial statements as of December 31, 2017:

Preferred Stock P    500,000.00
Common Stock (100,000 shares at P50 par)    5,000,000.00
Paid-in Capital in Excess of Par    2,000,000.00
Retained Earnings    1,000,000.00
Total Stockholders’ Equity    8,500,000.00

The market value of the stock is P60. Cash in Bank balance as of December 31, 2018 is at P1,500,000. How would you convince THEIR COMPANY to declare a stock split instead of cash dividends?

Answer 1

Cash Dividend - 10% of retained earning

Meaning -A cash dividend is money paid to stockholders,out of the corporation's current earnings or accumulated profits

10,00,000*10%= 1,00,000

Issue of share =2 for 1

ie 10000*2= 200000 Shares of par value 50 =100,00,000

Market Value 200000 shares at MP 60 = 12,00,000

profit 2,00,000

A stock split is a process taken by a company to divide its existing shares into multiple shares in an attempt to boost the liquidity of the shares. Liquidity provides flexibility for investors to buy and sell shares in the company without making too great an impact on the share price.Stock splits increase the number of shares outstanding and reduce the par value per share of the stock. For example, a two-for-one stock split means that the company stockholders will receive two shares for every share they currently own. The split will double the number of shares outstanding and reduce by half the par value per share. Existing shareholders will see their shareholdings double in quantity, but there will be no change in the proportional ownership represented by the shares.

A cash dividend is a payment made by a company out of its earnings to investors in the form of cash. This transfers economic value from the company to the shareholders instead of the company using the money for operations.