Background Information: Cipper Corporation is authorized to issue an unlimited number of no par value common shares, and has 100 000 shares outstanding. The business has the following balances in its shareholders' equity accounts:
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Cipper Corporation Shareholders' Equity
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Common Shares
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$300,000
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Retained Earnings
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120,000
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Total Equity
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$420,000
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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 one share for every four shares each shareholder owns. The current market price is $4 per share.
Value of Cash Dividend: 100 000 outstanding shares x $1 = $100 000
Value of Stock Dividend: 100 000 / 4 x 4 = 25 000 shares @ $4 each = $100 000
What effect does each scenario have on total shareholders' equity?
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Cipper Corporation Shareholders' Equity
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Before Dividend
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Cash Dividend
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Stock Dividend
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Common Shares
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$300,000
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$300,000
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$300,000
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Retained Earnings
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120,000
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20,000
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120,000
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Total Equity
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$420,000
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$320,000
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$420,000
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Book Value per share (Equity/# shares)
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$4.20
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$3.20
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$3.36
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Required: Assume that you own 800 shares in Cipper 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.