Milwaukee Tool has the following stockholders' equity account. The firm's common stock currently...

Question:

Milwaukee Tool has the following stockholders' equity account. The firm's common stock currently sells for $4 per share.

Preferred Stock $100,000
Common Stock (400,000 shares at $1 par) 400,000
Paid-in capital in excess of par 200,000
Retained earnings 320,000
Total stockholders' equity $1,020,000

a. Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share.

b. Show the effects on the firm of a 1%, 5%, 10%, and 20% stock dividend.

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

dividends?

Dividends

Dividends are the compensation declared and distributed by the company to its shareholders as of the date of record in its books. Dividends can be in the form of cash, stock, property, or even liquidating dividends in the case of the corporation's liquidation.

Answer and Explanation:

a. Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share.

  • $0.01 cash dividend
  • 400,000 * $0.01 = $4,000
  • $0.05 cash dividend
  • 400,000 * $0.05 = $20,000
  • $0.10 cash dividend
  • 400,000 * $0.10 = $40,000
  • $0.20 cash dividend
  • 400,000 * $0.20 = $80,000

b. Show the effects on the firm of a 1%, 5%, 10%, and 20% stock dividend.

  • 1% stock dividend
  • 400,000 * 1% = 4,000 additional shares
  • Common Stock (4,000 * $1) = $4,000 increase
  • Paid-in capital in excess of par (4,000 * $3) = $12,000 increase
  • Retained Earnings (4,000 * $4) = 16,000 decrease
  • 5% stock dividend
  • 400,000 * 5% = 20,000 additional shares
  • Common Stock (20,000 * $1) = $20,000 increase
  • Paid-in capital in excess of par (20,000 * $3) = $60,000 increase
  • Retained Earnings (20,000 * $4) = 80,000 decrease
  • 10% stock dividend
  • 400,000 * 10% = 40,000 additional shares
  • Common Stock (40,000 * $1) = $40,000 increase
  • Paid-in capital in excess of par (40,000 * $3) = $120,000 increase
  • Retained Earnings (40,000 * $4) = 160,000 decrease
  • 20% stock dividend (large stock dividend)
  • 400,000 * 20% = 80,000 additional shares
  • Common Stock (80,000 * $1) = $80,000 increase
  • Retained Earnings (80,000 * $1) = 80,000 decrease

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

dividends?

Paying dividends through the use of cash is the preferred method of rather than paying dividends through additional stock issuance.


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Dividend: Definition & Overview

from GMAT Prep: Tutoring Solution

Chapter 1 / Lesson 8
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