When a company that has issued stock makes a net profit, it has two choices. One is to issue cash dividends to its investors. In this case, the earnings leave the company, and shareholders each receive a payment proportionate to the equity that they invested. Alternatively, the company can capitalize its earnings. In this case, the firm retains its income for expansion or investment. It issues the shareholders new stock to make up for the denied cash dividends. The stock dividends' rate depends on the current stock price.
Divide the earnings that the company capitalizes by the price of its stock to calculate the number of new shares it issues as stock dividends. For example, if a company retains $10,000 for capitalization, and its stock sells at $50 a share, it must issue 200 shares to existing investors.
Divide the number of new shares by the number of outstanding shares. For example, if investors currently own 12,000 shares of stock, divide 200 by 12,000, giving a fraction of 0.0167.
Multiply this value by 100. In this example, 0.02 multiplied by 100 gives 1.67. Common shareholders will receive stock dividends at the rate of 1.67 percent.
- "Cornerstones of Financial Accounting"; Jay Rich et. al.; 2009
- "Schaum's Outline of Financial Management"; Jae K Shim, Joel G Siegel; 2009
- "Fundamentals of Financial Management"; Eugene F. Brigham; 2009
- "Financial Reporting & Analysis"; Charles H. Gibson; 2010