Smokey Joe’s Inc.: Stock Dividend

Posted: August 26th, 2021

Smokey Joe’s Inc.: Stock Dividend

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Smokey Joe’s Inc.: Stock Dividend

Question 1: Meaning of 50% Stock Dividend

            The stock dividend in a company refers to issuing additional shares to the existing shareholders instead of cash dividends. As stated, a 50% stock dividend implies that every existing shareholder in Smokey Joe’s Inc. will be issued with an additional share for every two shares held in the company. However, no cash payments will be received by the shareholders. Subsequently, each existing shareholder will get additional shares. The total outstanding shares for the company increases without any change in the value of equity. Thus, the net amount is a reduction in the book value per share. The total market value also remains constant after a stock dividend is issued, though it leads to a reduction in the share market value. 

           Therefore, as there are 50% additional shares of Smokey’s Inc. in the market, the value of each stock will drop in value. In this case, therefore, each shareholder receives 50% additional shares of Smokey’s Inc. and the market value of every share declining in value. The net effect will be that each existing shareholder is ending up with the same market value of the stock in the company as before the stock dividend was issued. After issuing the stock dividends, the journal entries will be recorded by debiting the retained earnings and crediting common stock in the company’s books of accounts. 

Question 2: Is Your Friend Getting Free-Stock

           Yes, the existing shareholder will receive additional free shares of Smokey’s Inc. in the form of a stock dividend. For instance, if the investor has 1000 company shares, he will get 500 (50% x 100) additional shares, topping up the number of shares already held. 

Question 3: A Cash or Stock Dividend

           An investor would prefer stock dividends as Smokey Joe’s Inc. is a growing company with the potential for future business growth. Thus, it will offer the company’s investors an option to grow their investment since the per-share value will rise from the profits generated. Therefore, an investor who is holding 1000 company shares with a par value of $10 per share, with thecompany offering 50% cash dividends, the investor is likely toget $5000. However, in the case of a 50% stock dividend, he will receive 500 additional shares.