Sing CD Company has had five years of record earnings. Due to this success, the market price of its 500,000 shares of $2 par value common stock has tripled from $15 per share to $45. During this period, paid-in capital remained the same at $2,000,000. Retained earnings increased from $1,500,000 to $10,000,000. President Joan Elbert is considering either a 10% stock dividend or a 2-for-1 stock split. She asks you to show the before-and-after effects of each option on retained earnings and total stockholders’ equity.
Calculate the stock dividend”s effect on retained earnings by multiplying the number of new shares times the market price of the stock (or par value for a large stock dividend).
Recall that a stock dividend increases the number of shares without affecting total stockholders’ equity.
Recall that a stock split only increases the number of shares outstanding and decreases the par value per share.
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