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IAI Actuarial Core Principles · Business Finance · Capital structure and dividend policy

Which statement best describes a scrip (stock) dividend offered by a company to its shareholders?

A scrip dividend gives shareholders extra shares in place of a cash dividend. Reserves are capitalised into share capital, so the company keeps its cash for reinvestment, while shareholders increase their holding without paying dealing costs.

  1. AShareholders receive additional shares instead of cash, so cash leaves the company and reserves are unchanged
  2. BShareholders receive additional shares instead of cash, so the company retains cash and reserves are capitalisedCorrect
  3. CThe company buys back shares from shareholders and pays them in loan notes
  4. DShareholders receive a one-off cash payment far above the normal dividend
  5. The company issues shares at a deep discount to existing shareholders only to raise new cash

Explanation

In a scrip dividend, reserves are capitalised and new shares issued to holders in place of cash, so the company retains the cash. The first option is wrong because cash does not leave. A special dividend is the one-off cash payment.

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