what is the market value of a share of stock dividend course hero

What is stock dividend?

A stock dividend, a method used by companies to distribute wealth to shareholders, is a dividend payment made in the form of shares rather than cash. Stock dividends are primarily issued in lieu of cash dividends when the company is low on liquid cash on hand. The board of directors. Board of Directors A board of directors is a panel ...

How does a dividend affect a company's stock?

Maintaining an “investable” price range. As noted above, a stock dividend increases the number of shares while also decreasing the share price. By lowering the share price through a stock dividend, a company’s stock may be more “affordable” to the public.

How many shares are in a small dividend?

A stock dividend is considered a small stock dividend if the number of shares being issued is less than 25%. For example, assume a company holds 5,000 common shares outstanding and declares a 5% common stock dividend. In addition, the par value per stock is $1, and the market value is $10 on the declaration date. In this scenario, 5,000 x 5% = 250 new common shares will be issued. The following entries are made:

Why do stock dividends depress the market?

The market may perceive a stock dividend as a shortage of cash, signaling financial problems. Market participants may believe the company is financially distressed, as they do not know the actual reason for management issuing a stock dividend. This can put selling pressure on the stock and depress its price.

How many shares does Colin own?

Colin is a shareholder of ABC Company and owns 1,000 shares. The board of directors of ABC Company recently announced a 10% stock dividend. Assuming that the current stock price is $10 and there are 100,000 total shares outstanding, what is the effect of a 10% stock dividend on Colin’s 1,000 shares?

Why do companies issue dividends instead of cash?

Issuing a stock dividend instead of a cash dividend may signal that the company is using its cash to invest in risky projects. The practice can cast doubt on the company’s management and subsequently depress its stock price.

Why does the price per share decrease?

Although it increases the number of shares outstanding for a company , the price per share must decrease accordingly. An understanding that the market capitalization of a company remains the same explains why share price must decrease if more shares are issued.

What is Market Value per Share?

Market value per share is the price at which a share of company stock can be acquired in the marketplace, such as on a stock exchange. This price varies throughout the day, based on the level of demand for the stock. The price will rise when more investors want to buy it than are willing to sell, while the price will decline in the reverse situation. Value investors closely follow this figure to determine when it makes sense to acquire shares at a sufficiently low price. An issuing company's treasurer also tracks the market price to determine when the price is high enough to justify a new stock issuance that maximizes the amount of cash raised by the entity in proportion to the number of shares sold. A business can establish a floor for its stock price by creating a stock buyback program that acquires shares on the open market whenever the market price drops below a certain threshold level.

How can the stated market value of a share be suspect?

The stated market value of a share can be suspect when few shares are available for sale and/or a company does not list its shares on a stock exchange. In this case, share prices can vary wildly on just a few small trades. This situation makes it easier for individuals to engage in fraud by making a few small trades to ramp up the market value per share, which they then use to sell larger blocks of shares to unsuspecting investors at the inflated prices. Investors can avoid this issue by only purchasing shares in companies for which there is a large float.

Why is the market value figure higher than the book value?

Also, the market value figure is usually higher than the book value figure, because market value per share incorporates the value of unrecorded intangible assets, as well as the future growth prospects for a firm.

What is the difference between book value and market value?

The main difference is that market value per share is driven entirely by demand for a company’s shares, while book value per share is a firm’s net assets, divided by the number of shares outstanding.

What is investor perceptions?

Investor perceptions of the future prospects of an issuing entity