Effect of Stock Dividend Favre Company has a history of paying cash dividends on its common stock. However, the firm did not have a particularly profitable year in 2010. At the end of the year, Favre found itself without the necessary cash for a dividend and therefore declared a stock dividend to its common stockholders. A 50% stock dividend was declared to stockholders on December 31, 2010. The board of directors is unclear about a stock dividend’s effect on Favre’s balance sheet and has requested your assistance.
1. Write a statement to indicate the effect the stock dividend has on the financial statements of Favre Company.
2. A group of common stockholders has contacted the firm to express its concern about the effect of the stock dividend and to question the effect the stock dividend may have on the market price of the stock. Write a statement to address the stockholders’ concerns.