Question

Since a firm hasn’t really changed because of the stock dividend, the total market value of the corporation should not change. In other words, if the total market value of the corporation was $1 million before the stock dividend, it should be $1 million after the stock dividend. However, the market value of each share should decrease: $1,000,000 divided by 100,000 shares = $10 per share, and $1,000,000 divided by 110,000 shares = $9.0909. The total market value of the individual’s holdings should also remain the same: 1,000 shares X $10 = $10,000, and 1,100 shares X $9.0909 = $10,000. If the market does not adjust for the increased number of shares, who will benefit?

Answer 1

It is correct that with the stock dividend the total value of the shares should not change. In the above case,

if the price per share was $10 per share with 100,000 shares

So, market value = 10*100,000 = 1,000,000

After the stock dividend

Number of stock outstanding = 110,000

And the price is 9.0909

So again, the total market value would be approximately 1,000,000

Now let’s say the market price of the stock did not change after the stock dividend and it remained at $10 per share, then the shareholders of the company will benefit from this. Their value from holding the shares have increased.