Question

1. What is a stock dividend? How is a stock dividend distinguished from a stock split?

Answer 1

A stock dividend is an alternate for cash dividend where new shares are issued to the existing stockholders instead of cash. On the other hand Stock split is dividing existing number of shares thereby increasing the number of shares and decreasing the market value as well as par value per share.

The total paid in capital in case of stock dividend increases and retained earnings decrease. While in case of stock split the total paid in capital remains same. An example of stock split is say if a company decide to stock split of 3 for every 1 stock, it means 30000 shares will be converted into 90000 shares. Now assume the 30000 shares have a face of 60 each it will have face value of 20 each after conversion.

The market value and par value of shares remain same in stock dividend whereas in stock split they decrease.

The similarity between stock split and stock dividend is that after issue issue of stock dividend and stock split total stockholder's equity remain same in both cases.