Fraser Valley Technologies Inc. had the following shareholders' equity on December 31, 2014:
Common shares, 200,000 shares issued and outstanding...............$2,000,000
Retained earnings...............................................................1,200,000
Total shareholders' equity...................................................$3,200,000
In the past, Fraser Valley Technologies Inc. has paid an annual cash dividend of $2.00 per share. In 2013, despite a large Retained Earnings balance, the board of directors wished to conserve cash for expansion and did not pay a cash dividend but distributed a 10 percent stock dividend. During 2014, the company's cash position improved, so the board declared and paid a cash dividend of $1.50 per share.
Suppose you own 10,000 Fraser Valley Technologies Inc. common shares, acquired January 2, 2012. The market price was $25.00 per share before any of the above dividends.
Required
1. How did the stock dividend affect your proportionate ownership in the company? Explain.
2. What amount of cash dividends did you receive in 2012? What amount of cash dividends did you receive in 2014? Would you expect the dividend per share to remain unchanged?
3. Immediately after the stock dividend was distributed, the market value of Fraser Valley Technologies Inc. shares decreased from $25.00 per share to $22.72 per share. Does this represent a loss to you? Explain.
4. Suppose Fraser Valley Technologies Inc. announces at the time of the stock dividend that the company will continue to pay the annual $2.00 cash dividend per share, even after the stock dividend. Would you expect the market price of the shares to decrease to $22.72 per share as in Requirement 3 above? Explain.