what rsquo s the difference between a stock dividend and a stock split why do compan 600824

Stock options, stock dividends, and stock splits

Diodes Inc. is a manufacturer and supplier of semiconductor products, primarily to the communications, computing, industrial, consumer electronics, and automotive markets. The company is headquartered in southern California, but most of its production facilities are in Asia (China, Taiwan, and Hong Kong). Revenues and net income in 2004 were $185.7 million and $25.6 million, respectively.

In 2004, employees exercised stock options on 1 135 982 shares, with a par value of 66²/₃ cents per share. The average exercise price was $5. In addition, Diodes received a tax benefit from the exercise of the stock options of $8 514 000. The tax benefit resulted from a US tax law that gives companies a tax deduction equal to the difference between the market price of their stock and the exercise price of the stock options on the date the options are exercised. The tax benefit reflects this difference, multiplied by the company’s marginal tax rate. Diodes’ accounting policy, in accordance with US GAAP, is to lump together the tax benefit and the cash proceeds received from the employees who exercise their options.

In November 2005, Diodes declared a 50% stock dividend, payable on 30 November 2005, to stockholders of record on 18 November 2005. Under the terms of the stock dividend, Diodes’ stockholders received one additional share for every two shares held on the record date. The company expected the number of outstanding shares of common stock after the dividend to increase from 16.8 million to 25.2 million shares. The par value of the company’s stock was not affected by the dividend and remained at 66²/₃ cents per share. At the end of November 2005, Diodes’ share price was $38.40.

Required

(a) Why do companies issue stock options to employees? What are the potential drawbacks? Why not just issue shares of stock instead of stock options?

(b) Why is the average exercise price of the stock options so low relative to the current share price?

(c) Give the summary journal entry to record the exercise of stock options in 2004.

(d) What’s the difference between a stock dividend and a stock split? Why do companies issue stock dividends? What motive might they have for a stock split?

(e) Given the journal entry to record Diodes’ stock dividends, how would the accounting change if the transaction was considered a stock split?