Cash dividend
A cash dividend involves the outflow of cash immediately after the dividend is declared. If the company does not have enough cash, it will be forced to borrow. While the purchase of stock periodically involves the use of cash in a delayed future. In the two instances are we preferred the periodic share re-purchase because it involves less money as compared to the money that has been spent in paying the dividends? From the present value point of view, the dollar spent today is not equivalent to the dollar spent tomorrow, meaning that the dividends that will be paid today will not be equivalent to the re-purchase of the shares of the same amount next year.
Therefore, re-purchase of the shares appeals to the managers of the company because it will allow the company uses the money to regenerate more money for the purpose of repurchase the shares in the future. However, from the point of a shareholder, cash dividend has a higher value as compared to stock purchase in the future. This is because of the argument for the present value of money. The dollar today has a higher value compared to the dollar for one year from now.
Therefore, the company should have a dividend policy that appeals to both the management and to the shareholders at the same time. The policy should take into consideration of the time value of money to both the shareholders and the management.
Stock dividends
This is when a firm pays in form of shares in form of cash dividends. It does not involve the real use of money but the shares of the shareholders are increased through a bonus issue. They are called non-cash dividends and they are issued normally in proportion to the number of shares one is holding. They are normally issued to the existing shareholders. This form of dividends is good when the company wants to use cash in other investments. They also make the shareholder believe that they have received something.
From the shareholder’s point of view, some may think they have received nothing however when they try to sell their shares in the market, they will get a higher value than they could have sold the original shares. Assume Mr. John has 10,000 shares of K limited and the company has had a recent earning of 220,000 and the earning is not expected to change in the future. Assume John Is entitled to 10% of the earnings and the shares are being sold at 15 dollars at the market and earnings per shares was 2.2 %. If John receives the extra share of 10%, he will have 11,000 shares that will generate earnings of 24,200 instead of the 22,000 he was entitled to.
Stock split
This is the division of the shares of the company. This normally occurs when the price of the share in the market has gone so high that most people cannot afford it. A stock split is important as it reduces the share price to the acceptable level price in the market that is affordable by many. It increases the number of shares to make the shares attractive to the people.
References
Givens C., (2002) More Wealth without Risk, Mc GrawHill, USA.
Sanzo R, (2005), Ratio Analysis for small Business, Yale University Publishers, USA.
Vandyck C. (2006), Financial ratio analysis, Wiley books, USA.