Dividends/Stock Splits/Reverse Stock Splits

A Reverse Stock Split causes the value of a stock to fall a)True b)False

False, it increases the market price of a firm's stock.

Stock splits increase the market value of a stock a)True b)False

False, stock splits lower the market price of a stock because the value of the company is divided among a larger number of shares.

Dividends (cash) increase the value of a stock a)True b)False

False, they decrease the value of a stock by the amount of the dividend.

If the Ex-Dividend date for a firm's declared dividend is October 17 (ignoring weekends and holidays), when is the last day someone could buy the stock and still get the dividend?

October 16th

stock dividend

A distribution by a corporation of its own stock to its stockholders.

stock dividend

A pro rata (proportional to ownership) distribution of the corporation's own stock to stockholders.

Chronology of Dividend Payout

Declaration Date Ex-Dividend Date Date of Record Dividend Payment Date

Are firms required to pay dividends?

No

Is a dividend a liability?

Not until a dividend is declared, then the firm is obligated to pay the dividend, hence it becomes an obligation, a debt, a liability.

Reverse stock split

Occurs when a corporation calls in its stock and replaces each share with less than one new share; increases both market value per share and any par or stated value per share.

Dividends are not

an expense

Stock Dividends and Stock Splits

Stock dividends and stock splits received are not "taxable events." When a stock dividend or stock split is "paid"; the issuer sends extra shares to the stockholder, with each share having a reduced real value. For tax purposes, the cost basis of the stock is adjusted for the stock split or stock dividend; no tax is due until the security is sold (if it is sold at a gain). Example: if a stock has a cost basis of $60 per share; and there is a 20% stock dividend; the cost basis is adjusted to $60 / 1.2 = $50 per share for the stock dividend. Notice that this is the same adjustment as that made to the market price of the stock on the ex date. Under IRS rules, stock dividends are not taxable at the time of receipt. The stock dividend results in the cost basis per share being reduced, with the number of shares held increased proportionately. In aggregate, the customer's cost basis remains the same.

Stock Dividends and Stock Splits

The effect of ____________ and ____________ on the value of a firm's stock and the wealth of shareholders is zero

When is the last day to buy a stock and still have a claim on the dividend it pays?

The last business day before the Ex-Dividend date.

All else held constant, what happens to the stock price of a firm once the stock goes ex-dividend?

The stock price falls by the amount of the dividend.

Stock splits and large stock dividends have the same effect on a company's retained earnings and total stockholders' equity a) True b) False

True

A reverse stock split is defined as:

a decrease in the number of shares outstanding that does not affect owners' equity.

Dividends are

a disbursement of cash to owners

Reverse stock split

a method used to raise the market price of a firm's stock by exchanging a certain number of outstanding shares for one new share

Stock Dividends and Stock Splits

are cashless transactions.

Dividends are _____.

earnings distributed to stockholders

Reverse stock split

investor's shares are split in half for the same total amount of money

Dividends

payments of cash from a corporation to its stockholders

Dividends are not

tax deductible

optimum trading range

the theoretical preferred price range for stocks, generally believed to be between $5 and $100. Firms often offer Stock splits when their stock prices get too high and offer Reverse Stock splits when their stock prices get too low.