STOCK DIVIDEND Stock Split University of Phoenix Stock Dividend In the present time the stock dividend has become important concept When dividend is given in form of stock it is called stock dividend In this form of dividend the cash does not use It is important when the corporation declares stock dividend the market value of the share decreases because the number of stock increases The many companies prefer stock dividend due to the tax benefit If the individual gets stock dividend he does not pay any tax on stock dividend Thus the stock dividend reduces tax burden On the other hand the ownership of investors also spurs up in the company because the number of holding share increases There is also disadvantage of stock dividend The market value of the share decreases so the market value of holding also decreases Kennon 2009 The ABC Company is leading company in its industry The number of outstanding share of the company is one million On the other hand the number of investors is five millions The value of market capitalization is 100 million The management declares 20 stock dividend Thus the 200000 shares will be distributed as a stock dividend The number of outstanding share will be increased by 200000 and the new total number of outstanding stock will be 1 2 million On the other hand the new value per share in the market will be 83 33 100 million 1 2 million This example is taken from below mentioned link http beginnersinvest about com od dividendsdrips1 a aa040904 2 htm Stock Split The stock split is also an important concept When the management wants to increases number of shares the management follows this method In this method the face value of the share is split and number of share gets increased Due to increment in number of outstanding share the market value of per share also gets affected but the total market capitalization of the company does not affect Both stock split and stock dividend increase number of outstanding shares but both are different due to the accounting treatment In the stock split the investors do not get any real benefit It is also known as non cash distribution of dividend The motto behind stock split is to increase trading of the shares in the market Baker 2009 For example the face value of per share is 100 and the total outstanding shares are 100 million If the management of the company announces stock split in ratio of 1 2 the total outstanding shares will be increased by 100 million thus the new total number of the share will be 200 million On the other hand the face value of the share will reduce by 50 So the new face value of the share will be 50 Due to effect of stock split the holding share of the investor will also increase in the prorate basis If the investor has 10 shares now he will have 20 shares It is important thing that the total issued capital will not be changed The illustration of stock split has been got from following link http www teenanalyst com stocks splits html Reverse Stock Split The reverse stock split is just opposite of stock split In this process the management reduces the number of outstanding shares The company increase face value of the share In this method corporation decides a ratio such as 2 1 Thus the company accumulates two shares in one share In this method the total market value of company does not change Due to reverse stock split the earning per share and face value of per share rises Thus the reverse stock split provides just opposite result from stock split It is important question why company selects this method When the management seems that the face value of the share is less as compared to competitors then the company goes for this method to make its share value to equal to competitor s share s face value It is also a sound strategy to increase treading of shares If the face value of share is too cheap in comparison to competitors the investors will be discouraged for investment For increasing the confidence of investors the management uses this method Mladjenovic 2009 For example an investor holds 100 shares of XYZ Company and the face value per share is 50 If the management go for reverse stock split option and declares one share for 10 shares then the holding of the individual will reduce 9 shares for every 10 shares Thus the new holding of the investor will be 10 100 10 shares but the face value per share will be 500 It is also important that the total market capitalization will remain as same as before reverse split The example of the reverse split is take form below mentioned link http www sec gov answers reversesplit htm References Baker H K 2009 Dividends and Dividend Policy John Wiley and Sons Kennon J 2009 All About Dividends Retrieved May 31 2010 from http beginnersinvest about com od dividendsdrips1 a aa040904 2 htm Mladjenovic P 2009 Stock Investing for Dummies Dummies
View Full Document
Unlocking...