What is the difference between a stock dividend and a stock split? As a stockhol

Question

What is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 200% stock dividend or a four-for-one split? Be sure to support your analysis with concepts introduced during this week's readings.

Let's examine your ability to calculate stock shares issued and outstanding. Assume the following transactions during the year (assume those transactions took place in numerical order:

1) Issued 100,000 shares of stock

2) Authorized a 2 for 1 stock split

3) Bought back 30,000 shares of Treasury Stock

4) Issued a 15% stock dividend

5) Re-issued 10,000 shares of stock

As of year end, how many shares are: 1) issued, 2) outstanding and 3) in Treasury stock?

Explanation / Answer

When company does not have enough cash to distribute as dividend, it issues stock dividend.

So if you are holding companies stocks, and it has declared 200% stock dividend, you will receive 2 additional stocks for every stock you are currently holding.

Due to stock dividend the number of shares o/s will increase, and stock price of the company will decrease.

Stock split occurs when the share prices of stock is very high, and management feels that it is too high for the investor, and liquidity of the stock start decreasing. To avoid this situation and to make the stock reachable for the investor, companies splits the stocks. So if you are holding 1 stock and company has declared 4 for 1 stock split, you will receive 4 additional stocks for every stock you are holding.

However in both the cases (Stock dividend and stock split), number of o/s shares will increase, and stock price will decrease in equal proportion.

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Hope that helps.

Feel free to comment if you need further assistance J

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