Stock Dividend Essay

* Definition:

* A corporate distribution to shareholders declared out of profits, at the discretion of the directors of the corporation, which is paid in the form of shares of stock, as opposed to money, and increases the number of shares.

* A dividend paid as additional shares of stock rather than as cash. If dividends paid are in the form of cash, those dividends are taxable. When a company issues a stock dividend, rather than cash, there usually are not tax consequences until the shares are sold.

* Explanation:

When a corporation declares a stock dividend, it adds undivided profits, which cannot be used to pay dividends, to the capital invested in the corporation, to reflect the additional shares it is issuing. The stockholder’s increased number of shares represent the same proportion of the value of the company as the stockholder originally held (that is, the stockholder owns the same percentage of the corporation as prior to the declaration of the stock dividend); however, the cash value of an individual share is not reduced.

Shares issued as stock dividends are evidence that additional assets have been added to the capital. The value of the shares of a corporation often, but not always, increases following a stock dividend. A stock dividend is actually a part of corporation bookkeeping. A stock split is different from a stock dividend in that no adjustment is made to the capital; instead, the number of shares representing the capital increase. The cash value of an individual share, therefore, decreases in proportion to the size of the stock split.

* Advantages:

* The benefit of a stock dividend is choice. The shareholder can either keep the shares or hope that the company will be able to use the money not paid out in a cash dividend to earn a better rate of return, or the shareholder could also sell some of the new shares to create his or her own cash dividend. * A stock dividend is an increase in the amount of shares of a company with the new shares being given to shareholders. * The biggest benefit of a stock dividend is that shareholders do not generally have to pay taxes on the value until the shares are sold. * Stock dividends are thought to be superior to cash dividends as long as they are not accompanied with a cash option. This is due to the choice that stock dividends offer compared to cash dividends.

* Disadvantages:

* The cost of issuing the new shares.

* Taxes and listing fees on the new shares.

* Other recording costs.

Stock splits

* Definition:

Division of already issued (outstanding) shares of a firm into a larger number of shares, to make them more affordable and thus improve their marketability while maintaining the current stockholders’ proportional ownership of the firm. The aggregate value of the shares remains the same as before the split, but the price (and dividend) per share declines with the split ratio.

* Example:

If a company splits its stock at 2:1 then, it will issue new shares for all the outstanding stocks. Therefore, 50% will reduce the individual share values. As a result, the stockholder may get twice number of stocks than they had earlier, but the total value will remain the same.

Read also  Picking a Stock

Stock splits can occur in different ratios, although the popular are 3:2, 3:1 and 2:1. There is also a chance of reverse split for a stock, but this does not happen frequently. The company may use the reverse stock split to push the small stockholders out.

Sometimes the stock prices go high; therefore, the investors think that a stock split may ease the situation. Stock splits do reduce the prices, which enable the investors, especially the beginners, to buy the shares at a low cost.

* Advantages:

* Sometimes low share prices may result in high liquidity, for low price stocks are often easier to sell. * Stock splits sometimes are treated as an indicator of a bullish market. * Stock splits pave the way for the small investors.

* Disadvantages:

* The companies expect more than the actual due to stock splits. So, if the expectations do not fulfill then the confidence of the investors may go down. Therefore, the share prices may further go down. * There is basically no relation between the performance of a company and stock split. So the companies will waste time if they wait for a stock split.

* Effects:

A share split will result in all shareholders holding more shares in the company. However, the STAKE in the nominal value of the company per share will remain the same (the share’s portion in the share capital). The nominal value per share will decrease. Each new share will carry the same rights as the pre-reverse-split shares (including voting rights and dividend entitlements).

* Preconditions:

A stock split requires Shareholder approval at an Annual General Meeting pursuant to the Board’s proposal. The proposal includes a resolution on a change in the articles of association with regards to the highest and lowest number of shares that may be issued.

* Dates for stock splits:

When dealing with transformations on stock splits, an investor needs to consider 2 dates:

Exdate and Record date:

* The EXDATE is the date at which the shares are trading at post-split prices.

* The RECORD DATE is used by the custodian to establish whom to debit and credit the shares from and to.

Depending on the market (country) the dates will be set in different ways. There are two main principles:

* Exdate driven markets:

In Exdate driven markets, the Exdate will be after the record date.

* Record date driven markets:

In Record date driven markets, the record date will be after the Exdate.

Stock Repurchases

* Definition:

* The purchasing and retiring of stock by the issuing corporation.

* A repurchase is a partial liquidation since it decreases the number of shares outstanding.

* It may also be thought of as an alternative to cash dividends.

* Alternative Reasons for Stock Repurchases:

* To use the shares for another purpose

* To alter the firm’s capital structure

* To increase EPS and ROE resulting in a higher market price

* To reduce the chance of a hostile takeover

More Essays

  • Corporation_ Weekly Reflection

    3.1 Differentiate types of stocks issued by corporations. The team concluded that the different types of stocks issued by a corporation are common stock, preferred stock, and treasury stock. Everyone is aware that common stock gives stockholders the right to vote on actions dealing with corporate earnings...

  • Preferred Stock

    Preferred stock is a security that, similar to debt, promises a well-defined (specified) but not necessarily constant contractual cash flow (dividend) to the holders of the security. Unlike debt, it does not cause the firm to be subject to bankruptcy if the dividends are not paid. The term preferred stock...

  • Dividend Yield and Common Equity

    Q1: Percy Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 9% and the company tax rate is 40%. Percy's CFO has calculated the company's WACC as 9.96%. What is the company's cost of common equity? Q2: Tunney Industries issued...

  • Preferred Stock Versus Common Stock

    The primary advantage to an investor of holding preferred stock compared with common stock is that the preferred stock return is somewhat more predictable (more certain). The issuing company will generally make a real effort to try to avoid defaulting on the preferred stock dividend. Since the return to...

  • Corporate Restructuring

    Purpose of Corporate restructuring : 1. To enhance the shareholder value 2. To utilize the assets properly 3. To get profitable investment opportunities 4. To diverse the business 5. To reduce cost of capital by designing innovative securities through corporate restructuring Types of Corporate...

  • Posthorn Corporation

    Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2010, for a cash consideration of $200,000 at a time when its shareholders' equity amounted to $1,000,000. The shares of both companies were traded on the national stock exchange. During 2010, Stamp...

  • Stock Price

    1. If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met? 2. If most investors expect the same cash flows from Companies A and B but are more confident that Company A's cash flow will be close to...

  • Formation of Corporations and Stocks

    * Why does a company choose to form as a corporation? What are the steps required to become a corporation? What are the advantages and disadvantages of the corporate form of doing business? Corporations are created in order to separate the businesses finances from the person's individual finances so that...

  • Are American Corporate Ceo’s Overpaid_

    I believe that CEO's are paid to much because it does not seem to matter just how well the company does while they are running it they still seem to make a ridiculous amount of money. This is wrong because they are supposed to be paid according to how well that the company does but even when it does poorly...

  • Theories of Capital Structure

    1. Apple Corporation has 2.5 million shares outstanding with a market value of $2.00 each (expected return = 16%) and debt with a market value of $1, 000,000 and a return of 10% Required a. What is the return on the capital of Apple Corporation? [Show all workings and formulae) [7.5 marks] 2. Samsung...

Read also  Derivatives Study Guide