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The Effects of Stock Splits and Dividends

1. Anum Inc. $10 par common stock is selling for $120 per share. 5 million shares are currently issued and outstanding. The board of directors wishes to stimulate interest in Anum Inc. Common stock before a forthcoming stock issue but does not wish to distribute capital at this time. The board also believes that too many adjustments to the stockholder's equity section, especially retained earnings, might discourage potential investors.

The board has considered 3 options for stimulating interest in the stock:
1. A 20% stock dividend.
2. A 100% stock dividend.
3. A 2 for 1 stock split.

Acting as financial advisor to the board, you have been asked to report briefly on each option and, considering the boards wishes, make a recommendation. Discuss the effects of each of the options on the stockholder's equity section.

Solution Preview

A 20 percent stock dividend will cause retained earnings to drop by (5,000,000*.20*$120), or $120,000,000. However, the common stock account will increase by (5,000,000*.20*$10), or $10,000,000 and the paid-in capital in excess of par value account will increase by (5,000,000*.20*($120-$10)), or $110,000,000. Therefore, overall stockholder's equity will not change. However, an ...

Solution Summary

This solution discusses the effect of a 20 percent stock dividend, a 100 percent stock dividend, and a 2-for-1 stock split on each component of the stockholders' equity section, as well as its effect on the overall section.

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