Please help- Stock dividends and splits?

Question

On June 30, 2005, Scizzory Corporation’s common stock is priced are $31 per shares before any stock dividend or split, and the stockholders’ equity section of its balance sheet appears as follows:Common stock- $10 par value, 60,000 shares authorized, 25,000 shares issues and outstanding. $250,000Contributed capital in excess of par value, common stock. 100,000Total contributed capital .350,000 Retained earnings.330,000Total stockholders’ equity .680,000.

Assuming that the company declares and immediately distributes a 100% stock dividend. This even is recorded by capitalizing retained earnings equal to the stock’s par value. Answer these questions about stockholders’ equity as it exists after issuing the new shares: a.What is the retained earning balance?b.What is the amount total stockholders’ equity?c.How many shares are outstanding? 2.Assume the company implements a 2-for-1 stock split instead of the stock dividend in part 1.Answer these questions about stockholders’ equity as it exists after issuing the new shares:What is the retained earning balance?What is the amount total stockholders’ equity?How many shares are outstanding?Explain the difference, if any, to a stockholder from receiving new shares distributed under a large stock dividend versus a stock split.

Answer 1

Assuming that the company declares and immediately distributes a 100% stock dividend. This event is recorded by capitalizing retained earnings equal to the stock’s par value. Answer these questions about stockholders’ equity as it exists after issuing the new shares:

a.What is the retained earning balance?

$80,000

b.What is the amount total stockholders’ equity?

$680,000 (no change)

c.How many shares are outstanding?

50,000 shares of $10 each

2.Assume the company implements a 2-for-1 stock split Answer these questions about stockholders’ equity as it exists after issuing the new shares:

What is the retained earning balance?

$330,000 (no change)

What is the amount total stockholders’ equity?

$680,000 (no change)

How many shares are outstanding?

50,000 shares of $5 par value

Explain the difference, if any, to a stockholder from receiving new shares distributed under a large stock dividend versus a stock split.

Given the paucity of financial statement effect, why would a company bother with a stock split?  The answer is not in the financial statement impact, but in the financial markets.  Since the same company is now represented by more shares, one would expect the market value per share to suffer a corresponding decline.  For example, a stock that is subject to a 3-1 split should see its shares initially cut in third.  But, holders of the stock will not be disappointed by this share price drop since they will each be receiving proportionately more shares; it is very important to understand that existing shareholders are getting the newly issued shares for no additional investment.  The benefit to the shareholders comes about, in theory, because the split creates more attractive opportunities for other future investors to ultimately buy into the larger pool of lower priced shares.  Rapidly growing companies often have share splits to keep the per share price from reaching stratospheric levels that could deter some investors.

Answer 2

Wrong.  First, not all stocks have a stated par value.  Second, if they do, you do not create more par value with a split.  You get trice as many shares each with half the par value.