A Stock Split Scenario - Essay Example

In a stock split, “each shareholder receives a multiple of the number of shares previously held” (Anthony, Hawkins & Merchant, 2004, p. 265).
Question #2
In the distribution of company earnings to stockholders through dividends, the accounting entry is:
Upon declaration: Debit – Retained Earnings
Credit – Dividends Payable
Upon payment: Debit – Dividends Payable
Credit – Cash
Hence, when dividends are declared shareholder’s equity decreases as a result of the decrease in retained earnings while liabilities increase as a result of the increase in dividends payable. Upon payment of the dividends, cash decreases while liabilities also decrease.
Question #3
Yes, you are right. Stock options even before they are vested have value. Such values are computed using complicated option pricing models such as the Black-Scholes option pricing model. These models are based on several factors.
Question #4
Therefore, the company does nothing.
Question #5
To attract investors, the company can also do the following:
• Issue stock warrants which give the rights to purchase a share of stock at a stated price within a given period
• Issue stock dividends that give existing shareholders shares instead of a cash dividend in proportion to the number of shares they own
• Maintain a stable dividend policy. Read More