Question

Cash versus stock dividend Milwaukee Tool has the following​ stockholders' equity account. The​ firm's common stock currently sells for $3.57 per share.

Preferred stock	​$ 94,000
Common stock ​(400,000 shares at $1.01 par)	404,000
​Paid-in capital in excess of par	214,000
Retained earnings	330000
Total​ stockholders' equity	$1,042,000

A. Show the effects on the firm of a cash dividend of

​$05 per share.

b. Show the effects on the firm of a 55​% stock dividend.

c. Compare the effects in parts a and b. What are the significant differences between the two methods of paying​ dividends?

Answer 1

Solution :-

1. Cash Dividend (404,000 Shares * 0.5$ Per share) = $202,000

Effect On Firm :-

	Before Dividend	After Cash Dividend
Preferred Stock	94000	94000
Common Stock	404000	404000
(400,000 Shares at $1.01 par)
Paid In capital in Excess of par	214000	214000
Retained Earnings	330000	128000
Total Stockholder' Equity	1042000	840000
Stockholder' Equity Per Share	2.605	2.1
Expected Change in Market Value	3.57	3.07

Note :-

1. Retained Earnings will decrease by the amount of Dividend Paid.
2. Market Value per share is expected to be decrease by the amount of cash paid by the Firm.

Tutorial Note :- In the Question it is not clear that the dividend paid is $0.05, $0.50 or $5.00 , So as per the framing of question it is assumed to be 0.5$ if its not correct please Replace the $0.5 With the correct figure.

2. Stock Dividend (400,000 Shares * 55%) = 220,000 Shares.

Thus the total amount of shares after issuing of dividend will be = 620,000 Shares

Effect On Firm :-

	Before Dividend	After Dividend
Preferred Stock	94000	94000
Common Stock
(400,000 Shares at $1.01 par)	404000
(620,000 Shares at $1.01 par)		626200
Paid In capital in Excess of par	214000	214000
Retained Earnings	330000	107800
Total Stockholder' Equity	1042000	1042000
Stockholder' Equity Per Share	2.605	1.681
Expected Change in Market Value	3.57	2.30

Note :-

1. Retained Earnings will decrease by the amount of Dividend Paid.
2. Market Value of the firm in total Would remain same as there is not actual outflow of fund from the Firm. The Total Stockholder' Equity is same in both the situation. And thus it will not affect the Market value of the Firm.
3. But because of the increase in No. of shares the market value of per share will decrease.

It is calculated :- 3.57*(400,0000/620,000).

Comparison of Part A and B

	Part A	Part B
Preferred Stock	94000	94000
Common Stock
(400,000 Shares at $1.01 par)	404000
(620,000 Shares at $1.01 par)		626200
Paid In capital in Excess of par	214000	214000
Retained Earnings	128000	107800
Total Stockholder' Equity	746000	1042000
Stockholder' Equity Per Share	1.865	1.681
Expected Change in Market Value	3.07	2.30

There is no change in total stockholder Equity in Part B Because there is no actual Outflow of the fund. But Because there is a significant increase in the no. of shares which will affect the per share value.

Similarly , The Market value in total Does not change in Part b but there is a change in Total market value of Firm in part A because of the actual outflow of the cash.