LG 5 P14-10 Cash versus stock dividend Milwaukee Tool has the following stockhol

Question

LG 5 P14-10 Cash versus stock dividend Milwaukee Tool has the following stockholders' equity account. The firm's common stock currently sells for $4 per share. Preferred stock Common stock (400,000 shares at $1 par) Paid-in capital in excess of par Retained earnings $ 100,000 400,000 200,000 320,000 $1.020,000 Total stockholders' equity a. Show the effects on the firm of a cash dividend of $0.01, s0.05, s0.10, and 50.20 per share b. Show the effects on the firm of a l %, 5%, 10%, and 20% stock dividend. c. Compare the effects in parts a and b. What are the significant differences be- tween the two methods of paying dividends?

Explanation / Answer

1

Workings

Part 2

Workings

Part 3

Stock dividends do not affect stockholders' equity they only redistribute retained earnings into common stock and additional paid-in capital accounts.

Cash dividends cause a decrease in retained earnings and, hence, in overall stockholders' equity.

Cash Dividend 0.01 0.05 0.1 0.2 Preffered Stock 100000 100000 100000 100000 Common Stock 400000 400000 400000 400000 Paid In capital 200000 200000 200000 200000 Retained Earnnings After Adjusting Dividend 316000 300000 280000 240000 Total Stockholder Equity 1016000 1000000 980000 940000

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