Dividends

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• Dividends
• Dividends need to be legal and requirements vary
  by state
• Can pay as long as not insolvent
• Can pay if fair value of net assets exceeds
  dividends
• Other states vary
• Restrictions are designed to protect creditors
• Payment of dividends is a strategic decision and
  depends on growth state of company

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• Types of dividends
• Cash
• Property
• Scrip
• Liquidating
• Stock
• Important dates
• Declaration date
• Record date
• Ex-dividend date
• Payment date

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Cash dividends become a liability when
declared Property dividends require that the
property be revalued to fair value and gain/loss
recognized before distribution Scrip dividends
are when the corporation distributes an IOU
instead of cash. Liquidating dividends represent
a return of capital instead of retained earnings
and should be charged to paid in capital
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Stock Splits Stock dividends are a pro rata
distribution of shares to owners which change no
ones ownership share. Small stock dividend
(less than 20-25) are accounted for at market
Large stock dividends are accounted for at
par. Actual impact of a stock dividend is to
reduce retained earnings and future cash dividend
potential.
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Stock Splits Stock splits are used to reduce the
share price in the market to keep a stock in the
trading range. Simply reduce the par value and
increase the shares outstanding. No formal
journal entry is needed. Unlike a stock
dividend, retained earnings is not
affected. Like a stock dividend, total
stockholders equity is not affected.
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Preferred Dividends Preferred dividends can be
cumulative or noncumlative participating or
nonparticipating
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Appropriations of Retained Earnings If
management wants to send a message that certain
parts of retained earnings are legally or
strategically not available for dividends,
retained earnings may be appropriated. This is
done with a simple journal entry which is
reversed when the appropriation is no longer
needed. The same thing can be accomplished, many
believe with less confusion, through a note
disclosure.
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Ratios Return on equity Net income preferred
div Avg Common SE Payout ratio Common
cash dividend Net income preferred
dividend Price Earnings Ratio Market
price per share EPS