Discussion

FIN534

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1
 A company that does not desire to pay cash discounts may compensate its shareholders in

two primary ways: stock dividend or stock splits. Stock dividends refer to shares that

shareholders receive instead of being paid cash dividends. A case in point a company may

declare a 10% stock dividend. Consequently, the shareholders would receive 10 shares for every

100 shares that they possess. On the other hand, a stock split refers to the shares of the company

being increased to attract more investment by reducing their prices. A case in point, a company

may declare a 1:1 share split; the shareholders would receive 1 share for every share they own.

For instance, if an individual has 100 shares and a tax split of 1:1 is declared, they would end up

with 200 shares.

I would prefer a two-for-one split over a 100% stock dividend. The primary reason for

this is that if I owned 100 shares and 100% stock dividend, I would end up with 200 shares.

However, under the two-for-one policy, I would receive an extra 200 shares that would make my

total to be 300 shares. For example, Google issued a 1.998: 1 stock split in 2014 (1). The initial

price of the shares was 1135.10; however, after the split, the price of the shares was $567.55.

Consequently, a person who owned one share would have 2.998 shares representing a capital

gain of nearly 50%.