pre-existing facts: - 500,000 authorized COMMON shares issued for $4.4 million -
ID: 2572233 • Letter: P
Question
pre-existing facts:
- 500,000 authorized COMMON shares issued for $4.4 million
- 30,000 (out of 100,000) PREFERRED SHARES issued for $ 100 per share
- company declared and distributed a 5% common stock dividend when the market price of the common shares was $46 per share
- share price of common shares had risen to $100 per share, so board of directors split shares 5:1.
- company declared cash dividend on common shares of $0.50 per share payable. In past years, dividend has been $2.00 per share.
1) so if i owned 50,000 common shares, and did not buy or sell any shares during the year, how has your ability to influence the management of the company changed over the year? Did you need to consider the existence of preferred shares on January 1, 2016? Explain briefly.
2) What do you think about the reduction in the cash dividend from $2.00 to $0.50? Explain
Explanation / Answer
Answer to 1
Initial holding of Common Shares is 50,000 shares. Number of Shares after stock split of 5:1 at the market price of $ 100 increases number existing 1 Common Share to 5 Common shares of $20 each i.e. each single Common Share of $ 100 is split into 5 new Common Shares of $ 20 each. Therefore, new Common Share count increases to 5 times i.e. 50,000 to 250,000 Common Shares.
If there is no issue of new Common Shares during the year, the proportional shareholding percentage remains the same, hence voting power remains unaffected. Declaration and payment of dividend does not have any impact on influencing power of shareholder on company. If company issues new Common Shares during the year and existing Common Shareholder decide not subscribe the same, his proportional shareholding percentage drops or gets diluted, hence his voting percentage also gets reduced to his new proportional shareholding percentage in the new diluted Common Share capital.
Increase or decrease of Preference Share capital does not have impact on influence of Common Shareholders on company, as Preference Shares usually does not carry voting rights.
Answer to 2
The cash dividends are reduced from earlier $ 2.00 to now $ 0.50 per Common Share but there is also increase in the number of Common Shares form earlier 1 Common Share to new 5 Common Shares in a stock split. Therefore, earlier 1 Common Share carried a dividend of $ 2.00 now 5 shares carry a dividend of $0.50 each. If we divide the earlier dividend of $ 2.00 into five it comes out to be $ 0.40 per share, that’s low as compare to $ 0.50 per share now by the difference of $ 0.10 per share.
Therefore, reduction of dividend from earlier $ 2.00 to now $ 0.50 per Common Share has in fact increased the net dividend by $ 0.10 per Common Share.
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