3. Columbia paper has the following stockholders equity account. The firm\'s com

Question

3. Columbia paper has the following stockholders equity account. The firm's common stock has a current market price of $30 per share.

Preferred stock $100,000
Common stock (400,000 shares at $2 par) $20,000
paid-in capital in excess of par $ 280,000
Retained earnings $, 100,000
Total stockholders equity $500,000

A. show the effects on Columbia of a 5% stock dividend?

B. Show the effects of (1) A 10% AND (2) A 20% stock dividend

C. In light of your answers to parts a and b, discuss the effects of stock dividends on stockholders equity

Explanation / Answer

No of shares issued = $20000/$2 = 10,000 shares A. 5% stock dividend will result in 5%*10,000 = 500 addl shares being issues at Par to shareholers. SO Total No of shares will be 10,000+500 = 10500 shares B. Show the effects of (1) A 10% AND (2) A 20% stock dividend (1) 10% Stock dividend No of addl shares issued as Stock dividend = 10%*10000 = 1000 SO Total No of shares will be 10,000+1000 = 11000 shares (2) 20% Stock dividend No of addl shares issued as Stock dividend = 20%*10000 = 2000 SO Total No of shares will be 10,000+2000 = 12000 shares C. Since every stockholder received additional shares, and since Columbia paper is no better off after the stock dividend, the value of each share should decrease. In other words, since Columbia paper is the same before and after the stock dividend, the total market value of the Columbia paper remains the same. SO the No of shares may increase, but Mkt value per share will come down due to same Value spread over a larger no. of shares

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