Question

Sunland Inc. is considering one of three options: (1) paying a $0.68 cash dividend, (2) distributing a 4% stock dividend, or (3) effecting a 4-for-1 stock split. The current fair value is $14 per share.

Help Sunland decide what to do by completing the following chart (treat each possibility independently):

		Before Action		After Cash Dividend		After Stock Dividend		After Stock Split
Total assets		$1,855,000		$		$		$
Total liabilities		$81,000		$		$		$
Common shares		990,000
Retained earnings		784,000
Total shareholders’ equity		1,774,000
Total liabilities and shareholders’ equity		$1,855,000		$		$		$
Number of common shares		55,000

Answer 1

Before Action $1,855,000 After Cash Dividend $1,817,600 After Stock Dividend $1,855,000 After Stock Split $1,855,000 Total assets $81,000 $81,000 $81,000 $81,000 Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders' equity Total liabilities and shareholders' equity Number of Common shares $990,000 $784,000 $1,774,000 $1,855,000 55,000 $990,000 $746,600 $1,736,600 $1,817,600 55,000 $1,020,800 $753,200 $1,774,000 $1,855,000 57,200 $990,000 $784,000 $1,774,000 $1,855,000 220,000 Working and explanation: Dividend - 55,000 shares * $0.68 per share = $37,400 - Reduces retained earnings and cash Stock Dividend Common stock - 55,000* 4% = 2,200 shares X $14 per common share-reduces retained earnings and increase common share capital For stock dividend - common share is credited with par value and excess value above par is credited to additional paid in capital Stock split affects only common share capital. Overall common capital will be same with new par value and increase in number of shares