Suppose the balance sheet of the financial statements you are analyzing had the following shareholders' equity amounts on December 31, 2017 (adapted, in millions):
Common Shares; 1,135 shares issued............................................. $ 278
Retained earnings......................................................................... $9,457
Total shareholders' equity............................................................. $9,735
During 2017, the corporation paid a cash dividend of $0.715 per share. Assume that, after paying the cash dividends, the corporation distributed a 10% dividend. Assume further that the following year, the corporation declared and paid a cash dividend of $0.65 per share. Suppose you own 10,000 of this corporation's common shares acquired three years ago, prior to the 10% stock dividend. The market price of the shares was $61.02 per share before the stock dividend.
Requirements
1. How does the stock dividend affect your proportionate ownership in the corporation? Explain.
2. What amount of cash dividends did you receive last year? What amount of cash dividends will you receive after the above dividend action?
3. Assume that immediately after the stock dividend was declared and distributed, the market price of the corporation's shares decreased from $61.02 per share to $55.473 per share. Does this decrease represent a loss to you? Explain.
4. Suppose the corporation announces at the time of the stock dividend that the company will continue to pay the annual $0.715 cash dividend per share, even after distributing the stock dividend. Would you expect the market price of the common shares to decrease to $55.473 per share as in Requirement 3? Explain.