Oregon Inc. $10 par common stock is selling for $110 per share. Four million sha

Question

Oregon Inc. $10 par common stock is selling for $110 per share. Four million shares are currently issued and outstanding. The board of directors wishes to stimulate interest in Oregon 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 stockholders' equity section, especially retained earnings, might discourage potential investors. The board has considered three options for stimulating interest in the stock:

1. A 20% stock dividend.

2. A 100% stock dividend.

3. A 2-for-1 stock split.

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

Explanation / Answer

Answer

1. A 20% stock dividend.

So Stock dividend = 20% * (4 million shares * $ 10 par value per share)

                                  = 20% * 40 million

   Stock dividend   = $ 8 million

A 20% stock dividend will reduce retained earnings by $ 8 million and will increase common shares of stock capital and paid in capital in excess of par (common stock) by $ 8 million.

2. A 100% stock dividend.

So Stock dividend = 100% * (4 million shares * $ 10 par value per share)

                                  = 100% * 40 million

       Stock dividend = $ 40 million

A 100% stock dividend will reduce retained earnings by $ 40 million and will increase common shares of stock capital and paid in capital in excess of par (common stock) by $ 40 million

3. A 2-for-1 stock split.

A 2-for-1 stock split: Number of Common shares of stock will increase from 4 million to 8 million. Retained earnings account, common shares of stock capital and paid in capital in excess of par (common stock) will remain unchanged.

The board of directors wishes to stimulate interest in Oregon 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 stockholders' equity section, especially retained earnings, might discourage potential investors.

So In my opinion , Company should go for a 2-for-1 stock split which will not affect retained earnings account and also increase number of shares of company traded in market to double and will reduce market price of shares of the company to half of current level. This will make shares affordable to buy by more investors and will increase liquidity and market action in common shares of stock of company.

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