 Personal finance practice problem using OneNote. Stock split versus stock dividend. Prepare to get financially fit by practicing personal finance. You're not required to, but if you have access to OneNote would like to follow along icon left-hand side practice problems tab in the 12 to 70 stock split versus stock dividends tab. Also take a look at the immersive reader tool the practice problems typically in the text area too with the same name, same number, but with transcripts, transcripts that can be translated into multiple languages either listened to or read in them. We're thinking about investments in stocks, stocks representing an ownership interest in a corporation. Corporations being separate legal entities whose ownership interest is broken out into standardized units or shares or stocks. We're also typically thinking about corporations that are publicly traded corporations, those trading on public exchanges allowing more transparency and access to individual investors, two things such as the financial statements of the corporation on which we can make decisions. Also keep in mind, if you're using investment tools like mutual funds and ETFs, your strategy may be different than if you're investing in individual stocks. When investing in individual stocks we might be drilling down to the trends and to the financial statements of the particular stock itself as opposed to with the mutual funds we might be focusing more in towards sections of the market for example. We're thinking about individual stocks here and investment, what would be the impact if we had a stock split or a stock dividend. So these are two different things that can have an impact on our holdings for example, for the investment. So let's look at it and we're gonna try to consider it from the company side of things to understand what is happening, why it's happening and what's gonna happen to our side of things on the investment. So first let's just consider the balance sheet of a company. So we just put together a balance sheet here imagining that we are investing have some stocks of this company. So they've got the assets, they got the liabilities, they got the equity. We're focused down here on the equity type of side of things. So the typical balance sheet the assets represent what the company has the liabilities represent the company owning something to third parties like a bank. The equity represents the ownership interest for the individuals. You could think about this a couple of different ways you might say one way to think about it from an accounting standpoint typically the assets what the company owns and the liabilities and the equity represent the who has claimed to those assets either a third party 348,000 plus the equity or the owners 987,000 and that gets us to the total here or we could think of it common from a finance kind of standpoint the net value of the company on a book basis would be the assets 1335000 minus the liabilities the 348000 and that would give us the equity kind of the ownership interest. One way to kind of keep that straight in your mind is to think well if the company liquidated they went out of business for example they went bankrupt for example they could sell all of their assets they could pay off the liabilities then in theory they would have 987,000 left to pay off the owners which are the shareholders and they can pay off the shareholders in accordance to the number of shares or the holdings the standardized units of shares that are distributed and outstanding in the market. Now I say in theory because in practice if they liquidated we don't know how much they're actually gonna get for like the fixed assets because they're on the books at a depreciable amount depreciable cost oftentimes or even if they were on the books for a fair value amount we don't because buildings and stuff are like unique in nature we don't know how much you can actually sell them for so that would be the general ideas that's kind of like the book value if they were to liquidate also note that that's not the actual value of the company when you consider future earnings potential because hopefully they're using those net assets to generate revenue that's why the stock price is gonna be higher than on a per share basis than the just the liquidation of the asset price for example. So what happens if there's a two for one stock split? So let's say there is a stock split if I concentrate on the equity section down here we're gonna say that there's common stock outstanding of the 100,000 shares that's how many shares are outstanding one person might own multiple shares but there's 100,000 shares out there standardized units of ownership we have a par value of $2 the par value does not represent market value or the amount that the stocks was sold for it's just a standardized unit so that if I was to see for example this 200,000 I can back into the number of shares that are outstanding 200,000 divided by two would give us the 100,000 shares for example and because if we use the actual value that they issued them for meaning usually this amount represents kind of the investment of owners in the company meaning they issued shares and they got money for them if we just issue it for the amount of money they got then it's not gonna have a nice even $2 par value because they're gonna issue them for however much money they could get which is not gonna be the same all the way through so sometimes oftentimes you see this par value and then you see the capital in excess of par that's how much they sold or issued the stocks over and above the par value so these two numbers on a balance sheet represent kind of like the owner investment in the company and that happens in a corporation with the corporation issuing stocks the initial public offering not the secondary market where most stocks are traded we usually buy from the secondary market these are issued from the company themselves they received most likely cash and they then increased these amounts the par value and the capital in excess of par so these are kind of like the investment the retained earnings represents the earnings of the company the company has generated earnings rolling through the income statement and then they roll into the balance sheet that they have not yet distributed or given back to the owners in the form of dividends because possibly they're keeping them they're holding onto them to buy more fixed assets for example which hopefully will increase the value of the company hopefully allowing for future revenue generation which means it should be reflected in the stock price hopefully but that's the retained earnings and then here's the total equity now what happens in a split if we own the stocks there's a couple of things that we're gonna be concerned about with the split we're gonna be concerned about well how many stocks am I gonna have after the split happens and what's gonna happen to my like percent ownership value after the stock split happens from the corporation side of things they might do a stock split when they're trying to possibly lower the stock price now the stock price is fairly low right now but if they were trying to lower the stock price they might do a stock split why would they wanna lower the stock price maybe if this was higher than what people could typically purchase for and they wanna lower it just they think that might increase the value in the stock just because the stock happens to be in a more price range that people like to buy at that might be one reason they wanna do a stock split so that shouldn't in theory have any impact really on us on the holdings side of things in theory right so what would happen on the company side of things is basically the capital amounts here would go up in shares from 100,000 to 200,000 but the par value would generally be cut in half so notice there's no net impact to this par value of the 200,000 so it's just kind of and then down here the capital in excess of par is still gonna be the 100,000 so notice they didn't issue new stocks there's no increase in the cash there's no increase in the liabilities they just basically adjusted the number of shares doubling the number of shares but cutting the par value in half so no change really on the totals of the balance sheet now this doesn't have any direct impact on the stock price because the stock price is driven by supply and demand but you would expect that if you had two 100,000 shares a day ago and now they just issued and announced a stock split to have 200,000 the stock price the market would reflect that and have the price meaning the stock price would most likely go from $12 down to $6 because the market would have that information would take that into consideration now again you could get an increase in the stock price because if they like the stock split if the market thinks that the price is more reasonable where the split happened and the split is typically often a good indicating sign it could increase the price relative more than six or something like that but you would expect in theory that the stock price would then go to having the stock price so there would be no impact to us then if we owned say if we own like 200 shares of this particular company then we would say 200 times two we would now have 400 shares but the 400 shares we would expect not to be worth $12 but would now be worth $6 so if I had 200 shares before times $12 I had a value of 2,400 and now I've got 400 shares times $6 which would be valued at the same 200, 400 in theory no change in my holdings although when I sell the stock I have a bit more complexity I have to deal with because now I've got a situation where when I bought the stocks I bought them at the full price and now I've got twice as many stocks that should be half of that so I gotta calculate the gain on that which could be a little bit confusing hopefully your broker can help you deal with those stock splits but that's the general idea now the other thing you could be concerned with as an investor is to say what if I have a significant impact on the workings of the company because I own a lot of shares meaning most of us don't so if I own like five shares out of 100,000 shares outstanding then I've got a pretty low percent ownership so it's not like I'm really impacting the decision-making process or I have a big sway on the board of directors for example but if I did if I had like 100,000 times 10% if I had 10,000 shares before then I might want that's gonna be a 10% interest that's a pretty significant chunk of ownership which means I have a lot of influence on who's gonna be elected for the board of directors and stuff for example so if I was significant then I could say well what would happen if I multiply this times two times two then I'd have 20,000 and there would be 200,000 shares outstanding divided by 200,000 I should be at that same 10% so I shouldn't have any real impact there either now we also then have the stock dividend situation so a stock dividend situation means that they're actually giving you value in the form of a dividend a dividend represents a distribution out of the retained earnings normally that's and the retained earnings represents the income of the company that has accumulated over time that they're gonna now give out in a dividend that's similar to a draw for a partnership or sole proprietorship but the dividend has to be even for all owners usually the dividends, a cash dividend so it comes out of cash that would be a decrease to the retained earnings decrease of the cash we on the investment side would get the cash but now they're gonna try to give a dividend of value giving something other than cash giving you stocks so let's say they gave a 10% dividend so if we consider what happens we're not gonna have any change once again to the assets or the liabilities but there's gonna be a little bit different of a change in the equity the thing we need to consider is the retained earnings it's gonna be coming out of then the retained earnings here so this will get a little bit technical on it but the general idea we have the same concerns on our side what's gonna be happening what value are we getting and what's gonna happen to our percent ownership shares for example on the company side of things they're gonna say okay we have in retained earnings the $687,000 we're gonna give out a dividend which we think is currently valued at $12 we know what it's valued at because that's what it's currently trading for so before we issued the dividend we had 100,000 shares so 100,000 we're gonna give a dividend times 0.1 so that's gonna be another 10,000 shares that are gonna be issued and we think they're valued according to the market at 12% times 12 that's gonna be 120 that a value that's gonna come out of retained earnings so I'm gonna subtract minus the retained earnings the $687,000 so it's coming out of that retained earnings that's where we get to the retained earnings here and then we're basically allocating the other side to the equity side of things adjusting the number of shares up to 110 now because that's how many shares are outstanding we still have the $2 power value because we're not gonna change the $2 power and that's gonna give us the 220 and the difference then is gonna go into the capital in excess of par so I'll explain that a little bit more in detail but the bottom line is that now retained earnings is impacted because we actually received value as opposed to up here we didn't get a distribution from retained earnings so we kind of have a form of income generally in terms of dividends that we've received not in terms of cash but with the stock dividend on our side on the investment side of things here we shouldn't have any change to our percent ownership generally as well because say we had 200 shares before if I got a 10% dividend times 1.1 110% we would be at 220 after the dividend had been distributed so if I had 200 shares before divided by 100,000 we would have the .002 if I had 200 times 1.1 that would be 220 divided by now I'm gonna have 110 shares divided by 110 shares that's gonna be the same percent so again for small investors we might not be so worried about our voting capacity because it's kind of like voting in a republic as an individual it's quite small but if we had a significant influence in the voting then that's gonna be more important to us let's calculate that in a little bit more detail the new number of shares we're gonna say starting shares are 100,000 we're gonna have a 10% dividend that means 100,000 times 10% 10,000 new shares issued so now we're gonna have shares at 110,000 the new total common stock then it's gonna be the 100,000 plus the 110 that's gonna give us our 110,000 right there the new common stock then we've got the new common the new total common stock is the 110 the par value is just a generic number so it's not what we sold them for it's not the value it's not the market price it's a generic number that's gonna stay constant that's the point, $2 unless we have a split and that's gonna be 220 so that means the 110 shares times the par value is 220 so the new capital in excess of par then is gonna be the stock price of $12 that we're issuing them for because that's the market price minus the par value which has eaten up that's that generic number of $2 gives us a difference of $10 times the 10,000 new shares so there's an increase in the capital in excess of par of the 100,000 that means the difference here is gonna be changed from the capital in excess of par and if we add that to the original balance now the capital in excess of par is 200,000 the retained earnings then was at the 687 that represents the earnings of the corporation that have not been yet distributed which are some of them are being distributed now which is gonna be the 10,000 new shares times the value of the new shares, $12 so we got then $120,000 worth not dollars but value dollars measured worth of value of shares in theory so the retained earnings was at the 687 it's gonna go down by that value that we received not in cash but in shares of 120 to get to the 567,000 and there's the 567,000 there