 In this discussion, we will discuss the discussion question of describe a stock dividend. So when we see a discussion question like this or an essay question like this, we may first want to discuss what type of business entity a stock dividend would be related to briefly, and then go into what a stock dividend is, then the effects on the stock dividend and why a company might want to have a stock dividend. Given the fact that the stock dividend is dealing with stock, we're talking about a corporate entity as opposed to a sole proprietor or a partnership. And a stock dividend also is a form of dividend here. So the dividend represents us giving back some value to the owners, the stockholders in this case. And so it might be first good to just think about what a dividend is in general, and then we'll go into basically a stock dividend. So normally you'd have a cash dividend, and that would be similar to a draw for a sole proprietor or partnership. Remember the goal of business is of course to generate revenue doesn't matter what type of entity sole proprietor partnership corporation. We want to generate revenue within the business, and then we're hoping the business will then pay that revenue typically in the form of cash to the owners so that we can then take it and use it for our personal use as the owners. In a sole proprietorship or partnership, that distribution is called a draw. And in a corporation, however, it's called a dividend, and it's a little bit different than a draw because if I'm a partner, I get to really, I have a lot more control as to how much I'm going to draw out. I'm restricted by some things like my capital account and how much cash is in the partnership and any kind of other restrictions in the partnership agreement. But I can draw out a different amount than another partner if I so choose typically. In a corporation, that's not the case. All the shares of a corporation need to have the same allocation of dividends. Therefore, you know, if the board of directors, in other words, if I own 51% of the shares, I still can't go and pressure the company even though I have voting power. I can't pressure the company to say give me some dividends and don't give the little guy that only owns one or two shares any dividends. Even though I have 51% in total control in terms of voting power, can't do that because the definition of the dividend of the stock is that the dividends need to be distributed evenly. So if I own 51% of the stock, I could pressure the company to give a stock, you know, a dividend, whether it be stock or cash. But if they say a cash dividend was given, it would have to be given equally to every share. If we own 51% of the shares, we would get more because we would get 51% times whatever dividend per share. If we owned one or two dividends, we would get less but we would still get a proportional amount to the amount of shares we own. So typically the normal kind of dividend would be a cash dividend. Now note that if it's a distribution to the owners, if we were a sole proprietor or partnership, we could distribute anything we want. We could give property, we could give equipment or something like that to the partnership or owner as part of a draw. For a corporation, we can't really give equipment as part of a dividend too easily. Why? Because we can't really divvy up equipment that easily. So it doesn't really make sense for us to give an equipment dividend or anything like that. But what we could do though is we could give a stock dividend, which is us basically taking some of our stock, the corporate stock that hasn't yet been distributed, and giving it to the current stockholders. So people that already own an interest in the company through stock are going to get an added interest in the company more stock through ownership. So we're giving something of value to the stockholders rather than it being cashed and being a further equity interest in the stocks through a stock dividend. Now a stock dividend is going to be a little bit different than a stock split because a stock split doesn't affect things like retained earnings or the paid in capital account. All that changes there is the par value and the number of shares. So the actual number for a common stock and paid in capital and retained earnings on the financials stay the same. If we do a dividend, you can think of it as what's happening here. You can imagine a two step thing happening. You can imagine a dividend being a normal dividend, like a cash dividend, where we take it out of retained earnings. We reduce the capital, we reduce the equity section, we reduce retained earnings, which represents the amount of revenue over and above the initial investment, less any dividends. We reduce that. And then if we would give a cash dividend, cash would go out to the owners. And then you can imagine the owners basically investing that cash back into the company and purchasing common stock. And if that was the case, you could see that the total equity would remain the same, total equity being comprised of common stock, additional paid in capital, the amount of investments from the owners and the retained earnings, the amount of earnings throughout the life of the business, less any distributions in terms of dividends. So what we're in essence doing with a stock dividend is we're moving something from retained earnings, still part of the equity section in terms of the account equation, assets equal liabilities plus equity. We're moving it from one part of the equity section, the earnings, to the investment part of the section, which is the common stock section. And that's all we're doing. But note that the equity section in total will remain the same when we have a stock dividend. However, the components will differ, meaning retained earnings, the accumulation of revenue less dividends will go down just like a normal dividend distribution if it was cash. And then the other side is going to go up, meaning the amount of investments type dividend will go up, which is going to be the common stock side. So that's going to be what will happen on the financials. And what will happen, why would we do that again? We might do that just to, one, it could give confidence and value in the stock. So it could be for purposes of, you know, valuation purposes on the stock exchange. It could also reduce the market price as well because if we give another stock dividend, what we're doing is putting more stocks out there. So if there was 100 stocks out there prior, we're now giving a stock dividend, therefore there's more stocks out there. And therefore the market price per stock should go down. Why would we do that? Because we want the stocks to be tradable. If we only had 100 stocks out there, and then we started to do very well, then those 100 stocks would start to be very costly. And as the price goes up, possibly we feel they're not as tradable. Maybe the market doesn't see them as valued as they could because they're not in the optimal kind of price range for purchasing stock. How could we fix that? We could somehow get more stocks out there. We don't want to lower the value of our company. We want to lower the value of the stocks, which are just representing the value of the company. I mean, and how do we do that? We just have more stocks. So our retained earnings is kind of represented, our book value is represented by stocks. If we just say there's more stocks out there, then each individual stock will be worth less. One way we can do that is to give a stock dividend to the current owners of the stocks.