Is a 5% stock dividend on shares trading at $20 per share equivalent to a $1.00 per share cash dividend? Is the chair’s suggestion ethical?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Intercontinental Clothing Distributors has paid cash dividends every year since the company was founded in 1990. The dividends have steadily increased from $0.05 per share to the latest dividend declaration of $1.00 per share. The board of directors is eager to continue this trend despite the fact that earnings fell significantly during the recent quarter. The chair of the board proposes a solution. He suggests a 5% stock dividend in lieu of a cash dividend, to be accompanied by the following press announcement: “In place of our regular $1.00 per share cash dividend, Intercontinental will distribute a 5% stock dividend on its common shares, currently trading at $20 per share. Changing the form of the dividend will permit the company to direct available cash resources to the modernization of facilities and other capital improvements.
Is a 5% stock dividend on shares trading at $20 per share equivalent to a $1.00 per share cash dividend? Is the chair’s suggestion ethical?
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