Question

In the past year, Gosser Corporation declared a 10% stock dividend, and Jenks, Inc. announced a 2-for-1 stock split. Your parents own 100 shares of each company's $50 par value common stock. During a recent phone call, your parents ask you, as an accounting student, to explain the differences between the two events. Make sure to include in the explanation what your opinion is on these actions and which you would prefer for your own investments.

Answer 1

Stock Splits: Stock split is a decision made by a board of director for increase the number of shares of organization. In this case only par value of the share will be broken and divided. Market price of the shares are also split in the same ratio of additional shares are issued.

So it means in stock split our par value of the shares are decreased from $ 50 to $ 25 and number of shares are increases from 100 Shares to 200 Shares. In this case there is no increased in investment value only dilution of shares only.

Stocks Dividend: Stock Dividend is payment made to shareholder in forms of additional shares in place of amount in proportionate of there earlier holding. In this additional shares are issued with same par value but market price of the shares are proportionally reduced.

So in this case 10% additional shares are issued with same par value it means 10% of 100 Shares equal to additional 10 shares issued with par value $ 50 and number of shares are increases from 100 shares to 110 Shares.

Decision:

From both options stock dividend option is much better option because in stock option value of investment is increases but in stock split there is no increase in investment value.