Which of the following statements are true regarding dividends?
Select all that apply
1. A large stock dividend is a distribution of more than 25% ?of previously outstanding shares.
2. A stock split can be used to keep the stock price affordable.
3. A small stock dividend is a distribution of 50% ?or less of previously outstanding shares.
4. The date of payment reflects the date a cash dividend is paid to stockholders.
The correct answer and explanation is:
Correct Answers:
✅ 1. A large stock dividend is a distribution of more than 25% of previously outstanding shares.
✅ 2. A stock split can be used to keep the stock price affordable.
✅ 4. The date of payment reflects the date a cash dividend is paid to stockholders.
Explanation:
Dividends are distributions of a company’s earnings to its shareholders. They can be in the form of cash dividends, stock dividends, or property dividends. Here’s why the selected statements are correct:
- A large stock dividend is a distribution of more than 25% of previously outstanding shares.
A stock dividend is when a company issues additional shares to shareholders instead of paying cash. A large stock dividend is defined as distributing more than 25% of outstanding shares, while a small stock dividend typically distributes less than 25%. Large stock dividends impact stock prices significantly because they increase the number of shares available. - A stock split can be used to keep the stock price affordable.
A stock split increases the number of outstanding shares while reducing the price per share proportionally. This strategy makes shares more affordable to investors and increases market liquidity. For example, in a 2-for-1 stock split, a shareholder with 100 shares at $100 each would now have 200 shares at $50 each. - The date of payment reflects the date a cash dividend is paid to stockholders.
The date of payment is the final step in the dividend process when the company distributes cash to shareholders. Key dates include:- Declaration Date: The board announces the dividend.
- Ex-Dividend Date: Investors buying after this date will not receive the dividend.
- Record Date: Determines who is eligible for the dividend.
- Payment Date: The date shareholders receive the cash dividend.
Statement 3 is incorrect because a small stock dividend is usually less than 25%, not 50% or less.