Stock Dividends


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Stock Dividends

  1. 1. Stock Dividends • Corporation declares and issues additional shares of its own stock to its existing shareholders • Why use stock dividends over cash dividends? - lack of cash o declare a dividend - other sources of cash tied up in debt financing or NPV projects - additional shares dilute the value of securities and lower the share price - are normally not part of taxable income, so perhaps preferred by wealthy shareholders • Declared by the board of directors on a specific date and then paid at a later date—similar to cash dividends RECORDED and recognized when declared Consider the following company’s excerpted statement of stockholders’ equity as of November 30, 2005: Common stock ($15 par, 10,000 shares issued and outstanding) $150,000 Additional paid-in capital—Common 50,000 Retained Earnings 80,000 Total Stockholders’ Equity $280,000 The company decides to pay a 15% stock dividend to common stockholders to be distributed on December 1, 2005. The stock was trading at $46 that day. 1. Calculate the amount of stock that will be issued as a result of the dividend. 15% x 10,000 = 1,500 2. Determine the size of the stock dividend (stock dividends below 20-25% are accounted for differently than those that are larger in magnitude. Small stock dividends use the market value of shares to determine the value of the stock dividend 1,500 x 56 = 84,000 Large stock dividends use the par value of the stock in order to determine the value of the dividend
  2. 2. 3. In order to declare the announcement of the dividend, we must: debit retained earnings for the entire value of the dividend, credit an account called stock dividends distributable for the par value of the stock, and record the rest as a plug in APIC. Retained Earnings 69,000 APIC—Common 46,500 Common Stock Dividend Distributable 22,500 4. When the dividend is distributed, we will strike the obligation (dividends distributable) and credit the stock account. Common Stock Dividend Distributable 22,500 Common Stock 22,500 After the dividend is declared and issued, determine the balances in the statement of stockholders’ equity. Common stock ($15 par, 10,000 shares issued and outstanding) Additional paid-in capital—Common Retained Earnings Total Stockholders’ Equity Caveats 1. Be aware of the difference in accounting for large and small stock dividends 2. Be aware of the Common Stock Dividend Distributable account, it is NOT a liability as we are not paying out assets or cash. It should be treated as a component of contributed capital. 3. Note that the neither the declaring or issuance of a stock dividend has an impact on total stockholders’ equity.
  3. 3. Stock Splits Similar to stock splits Increases total shares outstanding and has no tax implications to investors Enacted for many of the reasons stock dividends are encated Two differences, the par value of the stock is affected as well as the number of shares Otherwise there is NO RECORD of this transaction in the double-entry system, you must simply remember to adjust the par value and number of shares outstanding once a split has occurred There is no increase in wealth for the shareholders, although a stock split is usually a positive signal in regard to the future prospects of the corporation Statement of Stockholders’ Equity Delineates the relevant equity accounts tracking any significant events that occurred during the year and impacted the equity section of the balance sheet. Financial Ratios Based on Per Share Amounts—Computing Share Value Book Value per Share – represents the rights that each share of common stock has to the net assets of the corporation, thus, when only common stock is present, the book value per share is measured as Book Value per Share = Total Stockholders’ Equity Total Shares Outstanding Indicates the rights of the shareholder in the case of corporate liquidation, it does not represent market value or what the shareholder could get for the share of stock Also based on “stale” information, since assets are measured at historical cost, not current value If preferred shares are present, then you must deduct the liquidation value of the preferred shares, as well as any dividends in arrears if the preferred stock is cumulative T.S.E. – liq/redemption value of preferred shares – dividends in arrears Total Shares outstanding less preferred shares outstanding
  4. 4. Market Value per Share – more meaningful to shareholders engaged in rapid buying/selling The price at which the stock is currently selling Earnings per Share – one of the most quoted statistics for publicly-traded companies… allows investors to understand the piece of profits that are accumulating to their share Can be compared to the amount paid for the stock or the amount at which the stock is being currently traded Earnings per Share = Net Income – Preferred Shares Weighted Average number of C.S. outstanding Becomes more complicated as the share structure of firms is diversified (must account for potential dilutive securities such as convertible preferred and stock options) Often quoted and forecasted by professional financial intermediaries…. Analysts If a company does not meet or beat this forecast, stock downgrades and strong price revisions are usually precipitated Statement of Cash Flows Important to realize that cash is the lifeblood of firms. Bills can’t be paid with promises of payment from your customers, thus, companies can report healthy bottom lines and have near zero cash on hand to settle bills Differences between the cash-basis and accrual basis of accounting can accumulate bloated bottom lines with little cash inside the company’s stomach Companies can report income in years when cash decreased or losses for years in which cash increased Reports changes in cash OVER TIME (not a snap shot) in three areas Operating Activities Investing Activities Financing Activities The only financial statement upon which the cash basis of accounting is used
  5. 5. General Format Cash Flows from Operating Activities Inflows $xxx Outflows (xxx) Net Cash provided (used) by operating activities $xxx Cash Flows from Investing Activities Inflows $xxx Outflows (xxx) Net cash provided (used) by investing Activities xxx Cash Flows from Financing Activities Inflows $xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx If provided, the last two lines come from the balance sheet comparative statements of the cash account. The net increase (decrease) in cash should be the movement between the two snap-shots What is Cash? What is Equivalent? Recall our discussion of cash and cash equivalents, equivalents must be items readily convertible to cash for a known amount with maturities of three months or less On the state of cash flows, cash and its equivalents are combined in the statement of cash flows Hence, if I invested in treasury securities (government t-bills), there would be no entry on the cash flow statement (it would essentially be a cash-for-cash transaction) If I invest in another companies’ stock, however, since the risk of this stock is much higher and the value is not readily determinable, it would be reported on the statement of cash flows as an outflow beneath the financing activities section of the cash flows statement Operating Activities Acquiring and selling products and services, the definition will then change with each company • Purchasing inventory • Paying employees
  6. 6. • Collecting cash from account customers • Paying on accounts • taxes Investing Activities Acquiring and selling long-term assets, replacing equipment and expanding with new long-term assets Sometimes also called capital expenditures Sales of equipment usually do not make up a large magnitude of the companies cash flows Mergers with other companies as well as investing in held-to-maturity or available for sale securities are recorded here, but money spent (gained) on trading securities is reported on the operating activities section of the cash flow statement Pages 612-622 Pages 638-644