Chapter 11.4

Question 1

What is a dividend?

Answer 1

Something of value distributed to a firm’s stockholders on a pro-rata basis

Question 2

Is the definition of dividend interpreted differently by people?

Answer 2

Term not always used so precisely

Question 3

What is a type of dividend that doesn’t involve the distribution of value?

Answer 3

Stock dividend

Question 4

What is a stock dividend?

Answer 4

A distribution of new shares to existing stockholders in proportion to the percentage of shares that they own (pro rata); the value of the assets in a company does not change with a stock dividend

Question 5

When a company pays a stock dividend, what does it distribute?

Answer 5

New shares of stock on a pro-rata basis to existing stockholders

Question 6

What happens when a company pays a 10% stock dividend?

Answer 6

Each stockholder receives a number of new shares equal to 10% the number of shares the stockholder already owns

Question 7

If an investor owns 100 shares and a company pays a 10% stock dividend, how many additional shares does the investor receive?

Answer 7

10

Question 8

Are stock dividends as common as regular cash dividends?

Answer 8

No, but a number of companies pay stock dividends

Question 9

Give examples of companies that pay stock dividends

Answer 9

• Enbridge Energy Management
• Tootsie Roll Industries
• United Security Bancshares
  All payed stock dividends in 2017

Question 10

Why is no value distributed when a company pays a stock dividend?

Answer 10

Because the total market value of the firm remains unchanged.

Question 11

Consider a company that pays a 10% stock dividend. Assume that the company has total assets with a market value of $11,000, that it has 10,000 shares of stock outstanding, and that it has no debt. How much does the stockholder own and how much is each share worth?

Answer 11

Since there’s no debt, stockholders own all of the assets in the firm

Each share worth $1.10 ($11,000/10,000 shares = $1.10 per share)

Question 12

Consider a company that pays a 10% stock dividend. Assume that the company has total assets with a market value of $11,000, that it has 10,000 shares of stock outstanding, and that it has no debt. When the 10% stock dividend is paid, how much do the number of shares increase by?

Answer 12

By 10%, from 10,000 to 11,000

Question 13

How is a stock dividend being paid just an accounting change and not affect the value of total assets in the company?

Answer 13

No assets are going out of the company. As a result, the value of the total assets in the company doesn’t change

Question 14

Consider a company that pays a 10% stock dividend. Assume that the company has total assets with a market value of $11,000, that it has 10,000 shares of stock outstanding, and that it has no debt. When the 10% stock dividend is paid, how much does the value of each share decrease?

Answer 14

From $1.10 to $1.00
($11,000/11,000 shares = $1.00/share)

Question 15

Does a stockholder gain or lose value when a stock dividend is paid?

Answer 15

Neither: all that happens is that the number of shares each one owns increases and their value goes down proportionately

Left with exactly the same value as before

Question 16

A stockholder owned 100 shares worth $110 ($1.10 per share × 100 shares = $110) before the stock dividend will own how many shares worth how many $ per share after a 10% stock dividend is paid?

Answer 16

110 shares worth $110 ($1.00 per share × 110 shares = $110) afterward

Question 17

What is a stock split?

Answer 17

A pro-rata distribution of new shares to existing stockholders that is not associated with any change in the assets held by the firm; stock splits involve larger increases in the number of shares than stock dividends

Question 18

How does a stock split compare to a stock dividend?

Answer 18

Quite similar, but it involves the distribution of a larger multiple of the outstanding shares

Question 19

How can we think of stock splits as?

Answer 19

An actual division of each share into more than one share

Question 20

What do stockholders frequently receive in a stock split?

Answer 20

One additional share for each they already own (known as a two-for-one stock split)

Question 21

Give an example of stock splits involving even larger ratios than a two-for-one.

Answer 21

Three-for-one stock split in which each stockholder receives two additional shares for each share of stock they own

Question 22

Besides their size, what is a key distinction between stock dividends and stock splits?

Answer 22

Stock dividends: typically regularly scheduled events, like regular cash dividends
Stock splits: tend to occur infrequently during the life of a company

Question 23

Give an example of a company paying a two-for-one stock split.

Answer 23

Comcast Corporation announced on January 26, 2017. In this stock split, each Comcast stockholder received one additional share for each share that he or she owned on February 17, 2017.

Question 24

Does anything substantial change when a stock split takes place?

Answer 24

As with a stock dividend, nothing changes

Question 25

Although a stockholder might own twice as many shares after a split, how did nothing substantial take place?

Answer 25

Because the split doesn't change the nature of the company's assets, the shares represent the same proportional ownership in the company as the original shares

Question 26

In the Comcast example, the prices per share at the close of trading on Friday February 17 and Monday February 21, the next trading day, were $75.32 and $37.89, respectively. How many % price decline occurred and how was the decline expected? How had claims remained largely unchanged?

Answer 26

This 49.7% [($37.89 − $75.32)/$75.32 = −0.497, or −49.7%] price decline was almost equal to the 50% decline that you would expect from a two-for-one stock split The number of shares doubled, while the value of the expected cash flows against which stockholders had claims remained largely unchanged.

Question 27

What is the most often cited reason for why companies pay stock dividends or split their stock?

Answer 27

Trading range argument

Question 28

What does the trading range argument propose?

Answer 28

That successful companies use stock dividends or stock splits to make their shares more attractive to investors

Question 29

Why would stock dividends/splits have the effect of making a company's shares more attractive to investors?

Answer 29

Suppose the price of the stock of a successful company was allowed to continue to increase over a long time. Eventually, few investors would be able to afford to purchase a round lot of 100 shares. This, in turn, could affect the company's stock price

Question 30

What are odd lots?

Answer 30

Consist of less than 100 shares

Question 31

To understand the trading range, what needs to be known about odd and round lots?

Answer 31

It has historically been more expensive for investors to purchase odd lots (consist of less than 100 shares) than round lots (multiples of 100 shares)

Question 32

Why are odd lots less liquid than round lots?

Answer 32

Because more investors want to buy round lots

Question 33

Why is it relatively expensive for companies to service odd-lot owners?

Answer 33

The cost per share of sending stockholders annual reports and prospectuses or writing and mailing quarterly dividend checks

Question 34

How do the disadvantages of odd lots influence investor behavior?

Answer 34

Investors tend to be less than enthusiastic about purchasing odd lots of less than 100 shares and managers prefer that they do not

Question 35

According to the trading range argument, when might investors avoid buying stock at all?

Answer 35

When buying a round lot becomes too expensive

Question 36

How to stock dividends and splits offer ways to make sure "trading range" is appropriate?

Answer 36

They offer ways to bring the price of the stock down to the appropriate "trading range"

Question 37

Is the trading range argument backed by research?

Answer 37

Although it may be appealing to some, researchers have found little support for it

Question 38

After a stock split, does the stock's dollar trading volume appear higher than it was before the split?

Answer 38

No

Question 39

Why does the transaction cost argument no longer carry much weight?

Answer 39

As there is now little difference in the costs of purchasing round lots and odd lots

Question 40

Do companies all follow the "trading range" theory?

Answer 40

No, shares of some companies trade at per-share prices that are far above what is typically though of as a normal trading range?

Question 41

What is an example of a famous company who's per-share prices are much higher than the "normal trading range". Does the price of the share have any negative effects on the company?

Answer 41

Berkshire Hathaway, Inc: class A shares were trading for $250,660 per share on March 27, 2017, with no apparent negative effects.12

Question 42

What is a real benefit of stock splits in the context of management outlook?

Answer 42

Can send a positive signal to investors about management's outlook for the future. This in turn can lead to a higher stock price

Question 43

Why does a stock split send positive signals to investors about management's outlook for the future?

Answer 43

Management is unlikely to want to split the stock of a company two-for-one or three-for-one if it expects the stock price to decline It's only likely to split the stock when it's confident that the stock's current market price isn't too high

Question 44

What has a number of research studies reported evidence in the way investors tend to interpret stock splits?

Answer 44

Evidence indicating that investors tend to interpret stock splits as good news

Question 45

What kind of alternative stock splits do companies occasionally?

Answer 45

Reverse stock splits

Question 46

What happens in a reverse stock split?

Answer 46

The number of shares owned by each stockholder is reduced

Question 47

Give an example of a 1-for-10 reverse stock split. In the scenario you owned 1,000 shares of stock, how many shares would you have after the reverse split?

Answer 47

Stockholder receives one share in exchange for each ten shares they owned before. If you owned 1,000 shares of the stock of such a company, you would have only 100 (1,000/10 = 100) shares after the reverse stock split

Question 48

Why make reverse stock splits happen?

Answer 48

To satisfy exchange requirements

Question 49

What are requirements the NYSE and NASDAQ have for the listed price per share in which a company may want to undertake a reverse stock split to satisfy such requirements

Answer 49

NYSE: generally requires listed shares to trade for $5+ NASDAQ: requires shares to trade for at least $1

Question 50

How can being removed from the NYSE or NASDAQ severely negatively impact a companY?

Answer 50

Can dramatically reduce the liquidity of the company's stock and harm management's ability to raise capital in the future

Question 51

How can a reverse stock split help a company avoid the negative impacts from being removed from the NYSE or NASDAQ for not meeting requirements?

Answer 51

Can help avoid these negative effects by keeping the per-share price above the required thresholds