Why might a stock dividend or a stock split be of limited value to an investor The asset base remains the same and the stockholders' proportionate interest unchanged (everyone got the same new share ). Earnings per share will go down by the exact proportion that the number of shares increases. If the P/E ratio remains constant, the total value of each shareholders portfolio will not Increase The only circumstances in which a stock dividend may be of some usefulness and perhaps increase value is when dividends per share remain constant and total dividends go up, or where substantial information is provided about a growth company. A stock split may have some functionality in placing the company into a lower"stock price" trading range 18-10 Does it make sense for a corporation to repurchase its own stock? Explain A corporation can make a rational case for purchasing its own stock as an alternate to a cash dividend policy. Earnings per share will go up and if the price-earnings ratio remains the same, the stockholder will receive the same dollar benefit as through a cash dividend Because the benefits are in the format of capital gains the tax may be deferred until the stock is sold A corporation also may justify the repurchase of its own stock because it is at a very low price, or to maintain constant demand for the shares. Reacquired shares may be used for employee options or as a part of a tender offer in a merger or acquisition. Firms may also reacquire part of their stock as protection against a hostile takeover What advantages to the corporation and the stockholder do dividend reinvestment plans offer? Dividend reinvestment plans allow corporations to raise funds continually from present stockholders. This reduces the need for some external funds. These plans allow stockholders to reinvest dividends at low costs and to buy fractional individual. The strategy of dividend reinvestment plans allows forto shares, neither of which can be easily accomplished in the market by compound ing of dividends and the accumulation of common stock over time S-629 Copyright C2005 by The McGra-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-629 18-9. Why might a stock dividend or a stock split be of limited value to an investor? The asset base remains the same and the stockholders' proportionate interest is unchanged (everyone got the same new share). Earnings per share will go down by the exact proportion that the number of shares increases. If the P/E ratio remains constant, the total value of each shareholder's portfolio will not increase. The only circumstances in which a stock dividend may be of some usefulness and perhaps increase value is when dividends per share remain constant and total dividends go up, or where substantial information is provided about a growth company. A stock split may have some functionality in placing the company into a lower "stock price" trading range. 18-10. Does it make sense for a corporation to repurchase its own stock? Explain. A corporation can make a rational case for purchasing its own stock as an alternate to a cash dividend policy. Earnings per share will go up and if the price-earnings ratio remains the same, the stockholder will receive the same dollar benefit as through a cash dividend. Because the benefits are in the format of capital gains the tax may be deferred until the stock is sold. A corporation also may justify the repurchase of its own stock because it is at a very low price, or to maintain constant demand for the shares. Reacquired shares may be used for employee options or as a part of a tender offer in a merger or acquisition. Firms may also reacquire part of their stock as protection against a hostile takeover. 18-11. What advantages to the corporation and the stockholder do dividend reinvestment plans offer? Dividend reinvestment plans allow corporations to raise funds continually from present stockholders. This reduces the need for some external funds. These plans allow stockholders to reinvest dividends at low costs and to buy fractional shares, neither of which can be easily accomplished in the market by an individual. The strategy of dividend reinvestment plans allows for the compounding of dividends and the accumulation of common stock over time