Examining effects of Dividends on Shareholders Equity

Background Information: Zipper Corporation is authorized to issue an unlimited number of no par value common shares, and has 200 000 shares outstanding. The business has the following balances in its shareholders' equity accounts:

Zipper Corporation Shareholders' Equity
Common Shares	$400 000
Retained Earnings	220 000
Total Equity	$620 000

As you can see, the company has enough in its Retained Earnings account to declare a dividend. The board of directors has decided to either pay a $1 per share cash dividend or issue a stock dividend of one share for every four shares each shareholder owns. The current market price is $4 per share.

Value of Cash Dividend: 200 000 outstanding shares x $1 = $200 000

Value of Stock Dividend: 200 000 / 4 x 4 = 50 000 shares @ $4 each = $200 000

What effect does each scenario have on total shareholders' equity?

Zipper Corporation Shareholders' Equity	Before Dividend	Cash Dividend	Stock Dividend
Common Shares	$400 000	$400 000	$600 000
Retained Earnings	220 000	20 000	220 000
Total Equity	$620 000	$420 000	$820 000
Book Value per share (Equity/# shares)	$3.10	$2.10	$3.28

Required:

1. From the perspective of the Business, which option should they choose? Explain in as much detail as possible by outlining at least one advantage and disadvantage of the Cash Dividend and the Stock Dividend. After doing this, make a decision.

2. Assume that you own 500 shares in Zipper Corporation. Calculate the dividend you would receive from a cash dividend and from a stock dividend. As a shareholder, which would you prefer? Explain why in as much detail as possible.