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Stock Dividend, Stock Spilt & Reverse Stock Split



• Research Websites that contain examples of stock dividends, stock splits and reverse splits. Yahoo Finance is a good starting point. • Write a 200 to 300 work paper based on your findings. Include the following in your paper: 1. Definitions of stock dividends, stock splits, reverse splits and effects on per-share calculations. 2. An analysis of the reasons for stock dividends, stock splits and reverse splits. 3. An explanation of how stock dividends, stock splits and reverse splits affect the firm and the investors Stock Dividend If the dividend is distributed in form of stock instead of cash, it is called stock dividend. When the company announces the stock dividend, the market value of the share will decrease because the number of share increases. In the present time, many companies distributes dividend in form of stock dividend. The stock dividend provides tax benefits therefore companies select this method of dividend distribution. On the other hand, if the company has to enough case for dividend distribution, then company also chose this method. The investors get affected because of this method. The market value of share decreases as number of share increases. The outstanding and total number of investors of ABC Company is 1 million and 5, respectively. The company declares 20% stock dividend. The market capitalization of corporation is $100 millions. The company will distribute 200,000 shares as dividend. Thus the number of outstanding share will increase by 200,000 shares and total outstanding shares will be 1.2 millions. Thus the market value per share will be $83.33 (100 millions/1.2 million shares). The previous market value of share was $100 ($100 million/ 1 million shares). This example is found on the following website http://beginnersinvest.about.com/od/dividendsdrips1/a/aa040904_2.htm Stock Split In the stock split, the outstanding share of the company increases. In the stock split, the company splits face value of the shares and increases number of outstanding shares. The market value per share and earnings per share also decreases. The company selects option of stock split to increase trading of shares. For illustration, the total number of outstanding shares is 100 million with $100 per share face value. If the company chooses stock splits in ratio 1: 2 than total number of outstanding of shares will be 200 million with $50 per share face value. Thus if the investor has 10 shares then he will have 20 shares. This example is found on the following website http://www.teenanalyst.com/stocks/splits.html. Reverse Split It is just of stock split. In this option, the company decreases number of shares by increasing face value on pro rata basis. It is considerable; the total market value will be remained same. Since of it, the share holder’s per shares earning and market value increases. The corporation go for this when it seem that the price of share is low in comparison to other market players. The reverse stock split is done for increasing trading of shares. For illustration, if an individual has 10000 share of XYZ Company and the management of company announce reverse stock split for 1 for 10 shares, then the individual will have 5000 new share instead of 1000 shares. This example is got from the following website http://www.sec.gov/answers/reversesplit.htm.


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