Okay.
What we're going to do now is go through a variety of smaller topics to kind of close
out Chapter 13.
Okay?
So it's going to kind of seem like we're jumping around a little bit; but we're just covering,
you know, we're kind of concluding Chapter 13 with these subjects.
So let's go ahead and take a look at that first slide, which is on stock dividends.
Okay.
What are stock dividends?
Stock dividends are when the corporation distributes additional shares of its stock to its stockholders
without receiving any payment in return.
Okay.
Well, why would they do something like this?
Why would they give out more shares of stock without receiving any payment?
Well, we're going to see it can be used to keep the market price on the stock affordable.
Okay.
I'm going to show you that in a minute.
And also there's some that believe it can kind of provide evidence of management's confidence
that the company is doing well.
Okay.
Now, I always give a little bit of a caveat with the second one.
If the company is clearly doing poorly, you cannot do these little accounting tricks and
fool the market very easily.
Okay.
If you ever take a corporate finance class, you're going to learn that -- about the efficiency
of the financial markets.
Have you ever heard those terms?
The market is very efficient.
It's difficult to fool.
Okay.
So, you can't just do a stock dividend and, oh, it must be doing great.
Okay.
If everything else says otherwise.
But, you know, some believe that it can provide evidence that management feels like things
are going well.
But let's go back to the slide and concentrate on that first one.
It can be used to keep the market price on the stock affordable.
Let me give you an example.
Let me give you an example that kind of might clarify that.
All right.
Daniel, let's say that you have -- you personally own 100 shares of stock.
And let's say the market price out there -- and, of course, the market price is not determined
by us.
The market price is determined by the supply and demand curves.
Right?
Okay.
Let's say the market price out there is currently, oh, let's say it is $66 a share.
Does that make sense?
So you have 100 shares and the market price is $66 per share.
So what is your total value or portfolio worth of your shares?
>>6,600.
>>$6,600.
Are you with me?
Well, let's say they offer a 10% stock dividend.
Okay.
That means they're going to give you -- give every shareholder, 10% additional shares and
they're not going to require any payment.
Okay.
So how many more shares are they going to give you, Daniel?
10 more shares; right?
>>Yeah.
>>Okay.
So you had 100 shares.
They just gave you 10 more shares.
10% times 100.
So now you have a total of 110 shares; correct?
Now, the market is smart.
What is that market price going to move to?
>>Lower.
>>It is going to move to $60 per share.
So now, Daniel, what is your total portfolio worth?
>>6,600.
>>$6,600.
It hasn't changed, has it?
Okay.
It hasn't changed.
It was at 6,600 before, and it's still at 6,600.
You just have more shares, but the market price adjusted.
Does that make sense?
In a way you can think of it this way.
The size of the pie has not changed.
We're just cutting it into different size pieces.
Does that make sense?
So, a company might do this knowing that that market price is going to drop a bit and keep
it in the affordable range for people.
Make sense?
All right.
>>Wouldn't you want to -- wouldn't you not want that?
Like, as a stockholder, wouldn't you want your shares to be worth more?
>>That is a great question.
He asked, well, why would you want this?
Wouldn't you want the stock price to be going up?
That's a great question.
I'm going to answer it but I'm going to talk about one more topic because it will help
clarify it.
Okay?
All right.
Now, before I talk about that next topic, though, if you look in your book, you're going
to see that there are journal entries that you make in regards to stock dividends.
When you do what we just did, there are journal entries that that corporation has to make.
I am not going to teach you those journal entries.
Okay.
I used to teach those.
They're very complicated.
They're very confusing to make.
I mean, you can do it, but it's kind of complicated.
And the reason I'm not going to teach those to you is because I have been in accounting
for 25 plus years and I still do consulting.
Do you know how many times I've made a journal entry for a stock dividend?
Zero.
Okay.
I think the chances of anybody here ever making a stock dividend journal entry is extremely
rare.
If you do, call me up and you can be mad at me and we'll figure it out together.
Okay?
But if we had an infinite amount of time, I would teach you that; but I'd rather concentrate
on things that I think you're going to use and I think you're going to need in future
classes.
Make sense?
So I want you to understand the concept of a stock dividend but I'm not going to make
you learn those journal entries.
Okay.
All right.
Because you know what is a lot more -- a lot more common than a stock dividend?
Is a -- does anybody know?
>>Stock split.
>>A stock split.
Okay.
So let's take a look at a stock split.
A stock split is when additional -- a distribution of additional shares of stock to stockholders
according to their percent ownership.
Okay?
Now, this is a very similar situation.
It's just to a larger degree.
So let's take a look at this.
Let's say somebody has 100 shares of $10 par value stock.
100 shares of $10 par value stock.
Now, that's not the market value.
The market value is not up there anywhere.
They have 100 shares of $10 par value stock.
Let's say the company decides to do what is called a 2 for 1 stock split.
Well, what they're going to do is they're going to call in everybody's shares and they're
going to give you two shares for every share they called in.
Okay.
So, Henry, if you had 300 shares, they're going to give you 600 of the new ones.
Okay?
Michael, if you had 400, they're going to call those in and they're going to give you
800 of the new shares.
Make sense?
Now, that's a 2 for 1 stock split.
You can have 3 for 1 and even 4 for 1.
But let's talk about the 2 for 1.
Okay?
In this case, it's 100 shares of the $10 par value, that's the old stock.
They call it in and they give 200 shares of the new stock.
Now, I want you to note something.
The par value actually changes.
The par value changes.
The number of shares went to 200; but the par value of these shares and all shares actually
gets halved in a 2 for 1 stock split.
Are you with me?
Now, there is no journal entries on stock splits.
You do not make a journal entry.
The only thing that you change is the description on the balance sheet as far as what the par
value is and the number of shares outstanding and issued and all of that sort of stuff.
Does that make sense?
Okay.
Now, what do you think this does to the market price?
>>Reduces it by half.
>>You're exactly right.
It's going to reduce it by half.
So, Luke, let's say you had -- you personally owned 100 shares and let's say the market
price was $80 per share.
That's the market price.
So right now you have currently a portfolio of $8,000.
Is that correct?
>>Yep.
>>Well, they do this 2 for 1 stock split.
They call in these old shares.
They give you 200 new shares.
The market is very smart.
What is that market price going to drop to?
>>40.
>>$40 per share.
Okay.
So now you have a portfolio worth what?
>>8,000.
>>$8,000.
Okay.
Now, this is exactly like the pie situation.
Let's say this is the size of my pie that I have.
And let's say I currently have it cut in four pieces.
Okay.
A 2 for 1 stock split just says, we're going to double the amount of pieces.
The size of each piece is now half.
Okay.
The size of the pie did not change; but now we have eight pieces and each piece is one-half
the size of the original pie slice.
Does that make sense?
This is like if you take ten dimes and turn them into 20 nickels.
Okay.
Now, the market price went from $80 to $40.
Okay.
Let's talk about that.
This really makes sense when you think about it because take a company like Coca-Cola.
Coca-Cola has been around for longer than your grandmother has been alive.
Okay.
Over 100 years Coca-Cola has been around.
If you looked up Coca-Cola's stock price, their market price, in "The Wall Street Journal",
let's say it's $73.
So you might step back and say, now, wait a minute, you're telling me in 130 years of
business, Coke's price has only gone up by -- it's 73?
Do you see what I'm saying?
That doesn't seem like it's risen very much.
I mean, the most it could have risen by is $73 in 130 years or whatever?
No.
They have done many stock splits.
And that's why it's only that.
If they would have never done a stock split, their stock price might be, you know, $32,000
a share.
Okay.
Now, if they did have a stock that sold for 32,000 a share, not many people could purchase
that.
Is that correct?
Okay.
So you want to have people to be able to purchase your product.
>>So as your stock prices go up, then that's when you're going to start splitting it --
>>Yes.
And usually they like a trading range of, you know, I don't know, $30 to $90 or something
like that.
So as your stock price goes up, they will split it accordingly to get it back in that
range.
When I owned Pepsico stock, I can remember they did a 3 for 1 stock split.
Okay?
Does that make sense why you would do that?
No journal entries for stock splits.
Now, to your original question, Daniel -- and it was a great question.
You're, like, well, won't the stockholders be bummed because their stock price just went
from -- well, what did it go from in the case that we were doing on the document camera?
It went from $80 to $40.
No, they're not bummed.
They're fine.
Because the market's very smart.
Yes, the stock price dropped and -- but you have twice as many shares.
Okay.
Just like if you had two $50 bills and you took them to the bank and they gave you ten
$10 bills.
You wouldn't be going, man, did I lose money.
Because you didn't lose any money; right?
You still have $100.
Okay.
So the market's smart.
Matter of fact, some people think that, once again, when stock splits occur, that's a sign
that management thinks that the stock price is going to continue to rise.
Again, you cannot fool the market too easily; but there is some theory behind that.