Question

In: Finance

1. What is the Board of Directors? How do these people get their jobs on the...

1. What is the Board of Directors? How do these people get their jobs on the Board? What do they do for the corporation?

2. Explain why a corporation would declare cash dividends and its affect on the stock market.

3. Explain why a corporation would declare property dividends. Give one positive and negative result of property dividends.

4. Explain two reasons for a stock split. Research the cost of one share of Google common stock. Why would Google Split?

Solutions

Expert Solution

(1): Board of Directors is an elected group of people who represent the shareholders. These people jointly supervise the activities of an organization. These people get their jobs when they are elected by the shareholders. Before the election the list of nominated individuals are decided by the nomination committee of the company. The nomination committee is composed by the independent directors. The people in the Board takes important decisions for the corporation like hiring for important positions like CEO, CFO etc., dividend policies, executive compensation etc.

(2): A corporation declares cash dividend for the purpose of rewarding its shareholders. It should be noted that the shareholders have helped the corporation by providing it capital to run its business and hence a corporation declares cash dividend from its profits from time to time to reward its shareholders. Dividends affect stock markets. Payout of dividends makes stocks more attractive for investors and as such trading activity increases in the stock market. This causes prices to go up in the stock markets.

(3): A corporation would declare property dividends when it has significant amount of an asset lying with it and that can be used to reward the shareholders. The asset can be real estate, inventory, shares of a subsidiary company etc. One positive for property dividends is that puts physical assets in the hands of the shareholders. Also no dilution of current shareholding takes place. One negative for property dividends is that it will not work for investors who do not want to defer their taxes.

(4): Two reasons for a stock split are:

· Influence market price – This happens when the market price of a stock becomes too high. When this happens an average investor will not be able to buy the stock. To reduce the market price in such a case stocks are split.

· Perception of future growth – Stock split creates a perception of future growth. This is because when a company splits its stock then investors believe that the company will witness healthy growth in future.

Price of one share of Google (i.e. Alphabet Inc.) is $1,279. This is a very high price for a single stock and many investors who want to buy a single stock of Google will not be able to afford it. In such a case Google will split its shares to make its stock price more within the reach of an average investor.


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