FIN 614: Financial Management Larry Schrenk, Instructor

1.Stock Splits 2.Stock Dividends 3.Dividend Reinvestment Plans (DRIP)

Stock Splits: Firm divides its existing shares into multiple shares Like a stock dividend except it is expressed as a ratio For example, a 2 for 1 stock split is the same as a 100% stock dividend. Stock price is reduced when the stock splits. Common explanation for split is to return price to a “more desirable trading range.”

Shares of stock are merged to form a smaller number of proportionally more valuable shares. There are many ways to do this One simple way is for the corporation to cancel a uniform fraction of each shareholder's shares

Stock splits can be used to keep the price in the optimal range. But most stocks are purchased by institutional investors who have millions to invest and are indifferent to price levels. Plus, stock splits and stock dividends are expensive! Stock splits generally occur when management is confident, so are interpreted as positive signals.

Pay additional shares of stock instead of cash Increases the number of outstanding shares Small stock dividend Less than 20 to 25% Large stock dividend More than 20 to 25%

Stock Dividend Firm issues new shares in lieu of paying a cash dividend. If 10%, get 10 shares for each 100 shares owned Stock Split: Firm increases the number of shares outstanding, say 2:1 Gives shareholders more shares

Both stock dividends and stock splits increase the number of shares outstanding, so “the pie is divided into smaller pieces.” Stock Splits and Stock Dividends are economically the same The number of shares outstanding increases and the price of each share drops The value of the firm does not change. Unless the stock dividend or split conveys information, or is accompanied by another event like higher dividends, the stock price should fall so as to keep each investor’s wealth unchanged.

Shareholders can automatically reinvest their dividends in shares of the company’s common stock. Get stock versus cash There are two types of plans: Open Market New Stock

Firm issues new stock to DRIP enrollees, keeps money and uses it to buy assets. No fees are charged, plus sells stock at discount of 5% from market price, which is about equal to flotation costs of underwritten stock offering.

FIN 614: Financial Management Larry Schrenk, Instructor