Question

The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will be $1 per share, and there are 15,000 shares of stock outstanding. The market-value balance sheet for Payout is shown below.

                     

Assets		Liabilities and Equity
Cash	$250,000	Equity	$1,000,000
Fixed assets	750,000

     

Suppose that Payout changes its mind and decides to issue a 1% stock dividend instead of either issuing the cash dividend or repurchasing 1% of the outstanding stock. How would this action affect a shareholder who owns 400 shares of stock? (Round your answers to the nearest dollar.)

Total value of the position

$

Compare the effects of the repurchase to the effects of the cash dividend.

The value of the position is (Click to select)the same as lower than higher than under the cash dividend.

Compare the effects of the repurchase to the effects of repurchasing 1% of the outstanding stock.

The value of the position is (Click to select)higher than lower than the same as under the repurchase.

Answer 1

Meaning-

Cash Dividend- Company distributes cash to its shareholders as dividend.

Stock dividend- Company gives new shares to shareholders as dividend. Thus, cash position of company is not impacted. But, total number of shares increases as company has issued new shares in form of dividend.

Let us first understand that the number of shares the company had already issued, price per share and total value-

No. of shares already issued (a)- It is given in question that there are 15000 shares outstanding which means that company had already issued 15000 shares.

Total value of equity share (b) = $ 1000,000 (given in question)

Thus, price per share = (total value of equity shares/ no. of shares issued)

Price per share = $66.67

1. It is mentioned that company issues 1% stock dividend instead of cash dividend. A shareholder holds 400 shares, and we need to understand the impact of stock dividend.

Stock dividend = 400 shares * 1%

=4 shares.

So, the shareholder who owns 400 existing shares, will get additional 4 shares as stock dividend . So, his total shares (400+4 =404) and shareholding in the company increases.

2. We need to understand total value of company after stock dividend is issued-

As, the company issues 1% stock dividend, the number of shares issued as stock dividend = 15000 shares * 1% stock dividend = 150

Thus total number of shares increases to 15000 shares +150 shares = 15150 shares.

We already know (as explained in meaning of stock dividend) that in case, company given stock dividend , then cash is not impacted but no. of shares increases (in this case shares increased to 15150 shares from 15000 shares).

Further it is important to understand that company is giving this 150 shares as free (as dividend). So, company is not receiving anything in return in lieu of shares issued. Thus, total equity capital of the company will remain same at $1000,000.

It means that share capital remains same as previous ($1000,000) , number of shares increases (15150 shares).

Thus price per shares is reduced ($1000000/15150)

New Price per share after issue of stock dividend =1000000/15150 =$66.01 per share.

Total value of position-

Assets	Amount in $	Equity and Liability	Amount in $
Cash	$ 250,000	Equity(15150 shares of $66.01 each)	$1000,000
Fixed Assets	$750,000

3. It is told to compare effects of repurchase of 1% of outstanding stock with cash dividend-

Repurchase of 1% outstanding stock - Outstanding stock =15000 shares.

1% of 15000= 150 shares to be repurchased.

Price of 1 shares =$ 66.67 shares (calculated above solution 1)

Thus company need to pay $66.67*150 shares=$10000. It means that cash will reduce by $10000

Further as the company repurchases 150 shares, so its outstanding stock will reduce by 150 shares i..e (15000 shares-150 shares= 14850 shares)

Assets	Amount in $	Equity and Liability	Amount in $
Cash	$ 240,000	Equity(14850 shares of $66.67 each)	$990,000
Fixed Assets	$750,000

In case of cash dividend

Company gives $1 per share as cash dividend i.e. 15000 shares *$1= $15000.

Thus cash will reduce by $15000 and stockholders equity will reduce by $15000 as dividend payable liability is extinguished.

Assets	Amount in $	Equity and Liability	Amount in $
Cash	$ 235,000	Equity(15000 shares of $66.67 each)	$1000,000
Fixed Assets	$750,000	Dividend payable	(15000)

4. Thus, value of position under stock dividend ($1000,000) stock repurchase ($990,000) is more than under cash dividend ($985,000)