The stockholders’ equity section of Pillar Corporation’s comparative balance she

Question

The stockholders’ equity section of Pillar Corporation’s comparative balance sheet at the end of 2013 and 2014 is presented below. It is part of the financial data just reviewed at a stockholders’ meeting.

2,500,000

Paid-in Capital in Excess of Par...............

Retained Earnings (see Note).................

Note: Availability of retained earnings for cash dividends is restricted by $2,000,000 due to a planned plant expansion.

The following items were also disclosed at the stockholders’ meeting: net income for 2014 was $1,220,000; a 10% stock dividend was issued December 14, 2014; when the stock dividend was declared, the market value was $28 per share; the market value per share at December 31, 2014, was $26; management plans to borrow $500,000 to help finance a new plant addition, which is expected to cost a total of $2,300,000; and the customary $1.54 per share cash dividend had been revised to $1.40 when declared and issued the last week of December 2014. As part of its investor relations program, during the stockholders’ meeting management asked stockholders to write any questions they might have concerning the firm’s operations or finances. As assistant controller, you are given the stockholders’ questions.

Instead of a stock dividend, why didn’t you declare a cash dividend and let us buy the new shares that were issued?

December 31, 2014 December 31, 2013 Common Stock, $10 Par Value, 600,000 shares authorized; issued at December 31, 2014, 275,000 shares; 2013, 250,000 shares ..................... $2,750,000

2,500,000

Paid-in Capital in Excess of Par...............

4,575,000 4,125,000

Retained Earnings (see Note).................

2,960,000 2,825,000 Total Stockholders’ Equity ................... $10,285,000 $9,450,000

Explanation / Answer

A cash dividend is the dividend given in form of cash out of the earnings of the company and make it unable for the company to use those funds in market operations.

A stock dividend means given shares to shareholers ie increasing the amount of shares of the company

Company need to buy a new plant equipment for which it need funds, if company declares cash dividend, Co. will face shortage of funds , on declaring stock dividend company will able to retain cash with them, even stock dividend is benefecial for shareholderes in long run as they will get higher returns later, hoping that company will able to use money not paid out of cash dividend.

So this is the reason comapny declares stock dividend instead of cash dividend, and even copmany reduces the rate of cash dividend by $0.14 per share.

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