Question

In the past year , Cormier corporation declared a 10% stock dividend and figen Inc announced a two for a 1 stock split. Your parents own 100 shares of each company's

$50 par value of common stock. During a recent phone call, your parents ask you, as an accounting student, to explain the differences between the two events

Instructions:

write a letter to your parent that explain the effects of two events to them as a stockholder and the effect of each event on the financial statement of each corporation.

Answer 1

Stock split: A stock split is a decision of the board of directors to increase the number of shares in the organization. In this case, only the face value of the share will be decomposed and divided. The market price of the shares is also distributed in the same proportion of additional shares.

Therefore, this means that in the stock split, the face value of our stock is reduced from $50 to $25, and the number of shares is increased from 100 shares to 200 shares. In this case, simply diluting the stock will not increase the value of the investment.

Stock dividends: Stock dividends are payments to shareholders in the form of additional shares, which replace the proportion of stocks previously held. In this case, additional shares with the same face value will be issued, but the market price of the shares will decrease proportionally.

Therefore, in this case, 10% of the additional shares will be issued at the same face value, which means that 10% of the 100 shares is equal to the additional 10 shares issued at the face value of $50, and the number of shares is increased from 100 shares to 110 shares.

Decide:

Of these two options, stock dividend options are the better choice, because the value of the stock options invested has increased, but the value of the investment has not increased in the stock split.