CORPORATE FINANCE

chandniwadhwani92
Finance Junkie
Posts: 166
Joined: Mon Oct 06, 2014 7:36 am

CORPORATE FINANCE

Postby chandniwadhwani92 » Thu Jan 29, 2015 6:42 pm

stock dividend is a permanent capitalization of retained earnings to contributed capital. PLZ EXPLAIN

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

CORPORATE FINANCE

Postby edupristine » Fri Jan 30, 2015 5:33 am

Hi, the above statement means that when a company issues stock dividend it needs to capitalize its retained earnings, which means it transfers a portion of its retained earnings to the” paid in capital” (contributed capital) accounts which is nothing but a part of stockholder’s equity account in the balance sheet.
This will be cleared by an example easily. Suppose a company had 2 million shares outstanding at the beginning of the year and declared a 10 percent stock dividend on January 1. Assume Par value per share is $4 and current stock price as on 1st January is $40. To get the no. of shares issued after stock dividend multiply 10% with 2 million which is 200,000 shares. By multiplying 200,000 shares with $40 (current stock price) we will get the amount which needs to be reduced from retained earnings (means capitalizing of retained earnings) which is equal to $8 million. The portion of total capitalization by which the company increases its stockholder’s equity account is $800,000 (200,000*$4). In the end we will subtract the portion of increased stockholder’s equity account from the total capitalization to calculate the portion by which it increases its “paid-in capital”(contributed capital) account that is, subtract $800,000 from $8 million to get $7.2 million which the company added to its “paid-in capital” account.


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