Cash versus stock dividend Milwaukee Tool has the following stockholders\' equit

Question

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 $ 100,000 Common stock (400,000 shares at $1 par) 400,000 Paid-in capital in excess of par 200,000 Retained earnings 320,000 Total stockholders' equity $1,020,000 Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share. Show the effects on the firm of a 1%, 5%, 10%, and 20% stock dividend. Compare the effects in parts a and b. What are the significant differences between the two methods of paying dividends?

Explanation / Answer

Answer a Effect of cash dividend is that it reduces retained earnings to the extent of payout. Cash dividend per share $0.01 $0.05 $0.10 $0.20 No.of shares outstanding 400000 400000 400000 400000 Cash dividend paid $4,000 $20,000 $40,000 $80,000 Effect of cash dividend on Stockholders Equity is as under Preferred stock $1,00,000 $1,00,000 $1,00,000 $1,00,000 Common stock $4,00,000 $4,00,000 $4,00,000 $4,00,000 Paid in capital in excess of par $2,00,000 $2,00,000 $2,00,000 $2,00,000 Retained earnings $3,16,000 $3,00,000 $2,80,000 $2,40,000 Total Stockholders Equity $10,16,000 $10,00,000 $9,80,000 $9,40,000 Answer b Effect of stock dividend is NIL as overall stockholders equity remain unchanged. Stock dividend % 1.00% 5.00% 10.00% 20.00% No.of shares outstanding 400000 400000 400000 400000 Additional Common stock shares 4,000 20,000 40,000 80,000 Par value per share $1.00 $1.00 $1.00 $1.00 Addition in Common stock $4,000.00 $20,000.00 $40,000.00 $80,000.00 Effect of stock dividend on Stockholders Equity is as under Preferred stock $1,00,000 $1,00,000 $1,00,000 $1,00,000 Common stock $4,04,000 $4,20,000 $4,40,000 $4,80,000 Paid in capital in excess of par $2,00,000 $2,00,000 $2,00,000 $2,00,000 Retained earnings $3,16,000 $3,00,000 $2,80,000 $2,40,000 Total Stockholders Equity $10,20,000 $10,20,000 $10,20,000 $10,20,000 Answer c Significant difference between two methods is that in case of cash dividend the stockholders equity reduces whereas in case of stock dividend it remain unchanged.

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