LG 5 P1410 Cash versus stock dividend Milwaukee Tool has the

LG 5 P14-10 Cash versus stock dividend Milwaukee Tool has the following stockholders\' equity account. The firm\'s common stock currently sells for $4 per share. Preferred stock Common stock (400,000 shares at $1 par) Paid-in capital in excess of par Retained earnings $ 100,000 400,000 200,000 320,000 $1.020,000 Total stockholders\' equity a. Show the effects on the firm of a cash dividend of $0.01, s0.05, s0.10, and 50.20 per share b. Show the effects on the firm of a l %, 5%, 10%, and 20% stock dividend. c. Compare the effects in parts a and b. What are the significant differences be- tween the two methods of paying dividends?

Solution

1

Workings

Part 2

Workings

Part 3

Stock dividends do not affect stockholders\' equity they only redistribute retained earnings into common stock and additional paid-in capital accounts.

Cash dividends cause a decrease in retained earnings and, hence, in overall stockholders\' equity.

Cash Dividend	0.01	0.05	0.1	0.2
Preffered Stock	100000	100000	100000	100000
Common Stock	400000	400000	400000	400000
Paid In capital	200000	200000	200000	200000
Retained Earnnings After Adjusting Dividend	316000	300000	280000	240000
Total Stockholder Equity	1016000	1000000	980000	940000