CFA Level I · CFA Level I Exam · Analyzing Balance Sheets
At the start of the year, a company had 10 million ordinary shares outstanding with total equity of €200 million. It declares a 10% stock dividend when the market price is €30 per share, and the par value is €1. Compared with the pre-dividend position, the stock dividend will most likely cause total equity to:
Total equity will remain unchanged. A stock dividend merely reclassifies €30 million from retained earnings into share capital and share premium, both components of equity, and no assets leave the company, unlike a cash dividend.
- ADecrease by €30 million
- BRemain unchangedCorrect
- CIncrease by €30 million
Explanation
A stock dividend of 1 million shares at €30 moves €30 million from retained earnings to share capital (€1 million) and share premium (€29 million). Both are within equity, so the total is unchanged at €200 million. Only a cash dividend would reduce total equity.
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