Valley Mills Construction, Inc., had the following stockholders’ equity on June 30,2013:
Common stock, no-par, 100,000 shares issued......... | $250,000 |
Retained earnings...................................................... | 190,000 |
Total stockholders’ equity......................................... | $440,000 |
In the past, Valley Mills has paid an annual cash dividend of $0.25 per share. Despite the large retained earnings balance, the board of directors wished to conserve cash for expansion. The board delayed the payment of cash dividends and in July distributed a 10% stock dividend. During August, the company’s cash position improved. The board then declared and paid a cash dividend of $0.25 per share in September.
Suppose you owned 1,000 shares of Valley Mills common stock, acquired three years ago, prior to the 10% stock dividend. The market price of the stock was $22 per share before any of these dividends.
Requirements
1. What amount of cash dividends did you receive last year—before the stock dividend? What amount of cash dividends will you receive after the stock dividend?
2. How does the stock dividend affect your proportionate ownership in Valley Mills Construction? Explain.
3. Immediately after the stock dividend was distributed, the market value of Valley Mills stock decreased from $22 per share to $20 per share. Does this decrease represent a loss to you? Explain.
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