Stock Dividend Comparison
Response to the following problem:
Although Weaver Company has enough retained earnings legally to declare a dividend, its working capital is low. The board of directors is considering a stock dividend instead of a cash dividend. The common stock is currently selling at $34 per share. The following is Weaver's current stockholders' equity:
|
Common stock, $10
Premium on common stock
Total contributed capital
Retained earnings
Total stockholders' equity
|
$ 400,000
800,000
$1,200,000
1,300,000
$2,500,000
|
Required
1. Assuming a 15% stock dividend is declared and issued, prepare the stockholders' equity section immediately after the date of issuance.
2. Assuming, instead, that a 30% stock dividend is declared and issued, prepare the stockholders' equity section immediately after the date of issuance.
3. What unusual result do you notice when you compare your answers from (1) with (2)? From a theoretical standpoint, how might this have been avoided?