Question

In: Accounting

Yakahoma Corp has 80.000 common stocks. At the end of a profitable year it decides to...

Yakahoma Corp has 80.000 common stocks. At the end of a profitable year it decides to pay $2 cash dividend and 5 percent stock dividend. Current stock price is $12. How much will retained earnings reduce after cash and stock dividends distributed? *

Expert Solution

Dividend is a share of profits and retained earnings that a company pays out to its shareholder.

Cash Dividend :

Cash dividend is the type of dividend in which payment of actual cash from the company directly to share holders and is the most common type of dividend

Stock Dividend :

Stock dividend, a method used by company to distribute wealth to shareholders , is a dividend payment made in the form of shares rather than cash.

Stock dividend does not increase share holders wealth.It increases the outstanding shares and decreases the price per share.

Board of directors decides when to declare dividend and in which form.

Coming to the question :

When a company issues Cash dividend, Retained earnings and cash will be reduced by the amount of cash dividend distributed to shareholders.

So an amount of $160,000 (80,000*2) will be reduced in retained earnings.

In the case of stock dividend price per share will be reduced which explained as below.

Market capitalization = $960,000 (80,000*12)

Increase in shares outstanding = 4,000 (80,000*5%)

Total Shares outstanding = 84,000 (80,000+4,000)

Price per share = 11.43 ($960,000/84,000)

Share price reduced from 12 to 11.43

ekkarill92 answered 1 year ago

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