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“Distributions to Shareholders” Please respond to the following:
From the e-Activity, contrast the differences between a stock dividend and a stock split. Imagine that you are a stockholder in a company. Determine whether you would prefer to see the company that you researched declare a 100% stock dividend or declare a 2-for-1 split. Provide support for your answer with one (1) real-world example of your preference.
This week DB(s) revolve around stock dividends and stock splits and the feasibility of the two. Thus, essentially, what is asked is whether or not a 2-1 stock split can benefit parties involved or stakeholders. However, the best method of determining this question, is defining the difference between a stock split, and a dividend.
Stock split – Investopedia, an online database for the collection of financial connotations defines as stock split as, “acorporate action in which a company divides its existing shares into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split did not add any real value.”
Stock dividend – Additionally, Investopedia defines this element as, “A stock dividend is a dividend payment made in the form of additional shares, rather than a cash payout.”
The company that I researched, Coca Cola, announced in July 2012, that they would be undergoing a 2-1 stock split, Coca-Cola competes in an industry (the Carbonated Soft Drink – CSD, or Non-Alcoholic Beverage – NAB) in which it is profitable for a firm to accept the risk of such an endeavor as splitting the shares prices can actually benefit the firm by attracting investors to a brand that has been in existence for over a century. In my opinion, because of the completion in the market place, and Coca-Cola’s proven track record or, past performance, this endeavor would ultimately mean that more investors would by into the conglomerate. Of course this was safe and beneficial to Coke. However, for a company in a different industry who’s past performance or brand does not warrant such an action, this may not even be a consideration. Not only can a split erode the price of stocks, but the firm’s credibility and image can be severely damaged, as such a split could be viewed as an act of desperation. As stated in the aforementioned a market analysis is needed prior to this type of action taking place. Thus, Coke’s actions were appropriate by my analysis.
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