CF 13-1A – Stock Dividends – Corporate Finance

Let's go through problem 1318. This has us exploring stock dividends. So a stock dividend is when a company issues new shares to existing shareholders. It's a dividend. So they're not paying for it. They're not buying in to be part of the dividend. They're just given new shares. Well, if a company gives new shares, issues new shares, but they don't get paid for those new shares, the company doesn't really change. They don't have any more assets. They don't have any more firm value. There's just more shares out there in the world. And so what does that mean? Well, it means the price of a share is going to go down because it's the exact same asset underneath, the exact same value of company underneath, but there's more pieces, right? You're cutting the same pizza pie into more slices. You can cut the pie into six slices. Oh, I got a big piece. Cut it into eight slices. Oh, my piece is a little small. That's what's happening. Acorn Tools has a million shares outstanding at a price of $50 a share. That means this is a $50 million company, right? That's the stock or the market cap or the value of the company. Theoretically, what will the price be after the following independent events? Okay, we do a 10% stock dividend. So that means we had a million shares, but now we're giving away 100,000 more shares. 10% of a million is 100,000. So we have 1.1 million shares out there, but we still have a $50 million company. So we just go, okay, it's $50 million divided by $1.1 million shares. What's the value per share? 50 million divided by one, $45.45. What about a 40% stock dividend? Okay, well now, rather than 1.1 million, we have 1.4 million, right? We go from a million, 40% is 400,000. So 1 million plus 400,000, 1.4 million. We still have a $50 million company though. Our company is the exact same company today as it was yesterday. We have no new money, no new nothing. And so we have a $50 million company, and now we have 1.4 million shares outstanding. So the price per share, $35.71. That's the value per share. The final situation, we issue a three for one stock split, meaning we go to 3 million shares outstanding. You can trade your one share and get three. We'll have 3 million shares after this happens. Our company is still a $50 million company. 50 million divided by three, 3 million. I was going to divide by three and get a strange answer, $16.67. Now you could, in any of these, actually just take your stock price. So the first case, $50 per share divided by 1.1, because it's a 10% and you get 45.45. So 50 divided by 1.1. This one is 50 divided by 1.4, and this one is 50 divided by three. And you end up, you know, right answers across the board. I think of it in the other way. And again, mine is kind of silly. It's an extra step, but it's the way my brain processes this stuff. So why does a company do this? Like, why would a company bother to do this if shareholders in the same spot afterwards, right? Rather than having one $50 share, I have three $16 shares. It's like, okay, I still have $50 worth of shares in the company. And what's the difference? You know, it's an interesting thing. Sometimes companies do it because their stock price is getting too high. It might be unattractive for people to invest. You know, if a stock costs, let's just say $10,000, I'm probably, as an investor, just not buying it. You know, me, like my net worth isn't so high that I would want to buy a single $10,000 stock, even if I thought it was a pretty good company. I would rather buy stocks in smaller pieces. And so there are some amount of retail investors like me that will just shy away from a stock with a very, very, very large price. So that's part of the reason. That's the reason I can come up with for these stock dividends. But perhaps you have a better reason. If you do, leave it in the comments just after you're done liking this video. Thanks for watching. Bye-bye.