415 Stock split versus stock dividend Distilled Water Corpor

4-15 Stock split versus stock dividend Distilled Water Corporation is a company special izing in water purification and distributing bottled water to retailers. The corpora- tion is considering a 3-for-2 stock split. The current stock price is $25 per share. stockholders\' equity account is as follows: Preferred stock Common stock (150,000 shares at $6 par) Paid-in capital in excess of par Retained earnings S 500,000 900,000 2,850,000 760,000 5,010,000 Total stockholders\' equity a. What changes will occur in the stockholders\' equity account from the 3-for 2 stock split? b. What change would you expect in the stock price as a result of the stock split? c. Calculate the maximum cash dividend per share that the firm could pay on com- mon stock before and after the stock split, assuming that legal capital includes all paid-in capital. d. A stockholder owns 200 shares. Based on the maximum dividends payable (see part c), would the stockholder prefer the 3-for-2 stock split? Differentiate between stock splits and stock dividends. e.

Solution

a. Decrease in par value due to 3 for 2 stock split from $6 to $4 [$6 * 2/3]

Increase in Common stock from 150000 shares to 225000 shares [150000 shares * 3/2]

b. Decrease in current stock price from $25 per share to $16.67 per share [$25 * 2/3]