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30 August, 06:56

Split-Div, Inc., has issued quarterly dividends of $0.10 per share each quarter over the last few years. This quarter Split-Div initiated a 2-for-1 stock split. What is the minimum quarterly dividend the board of Split-Div should approve to avoid sending a bad signal to investors?

a. $0.02 per share

b. $0.05 per share

c. $0.10 per share

d. $0.20 per share

Answers (1)
  1. 30 August, 08:14
    b. $0.05 per share


    A stock split is conducted by companies to make investors have additional share (s) for each share they already own. One of the reasons why a company would do this is to make each share less expensive especially if it has realized that similar shares in the industry are selling at a price significantly lower that its own shares. However, it is important to note that the value of each investor's holding remains the same.

    In this case, a 2-for-1 stock split means that an investor who has 1 share will now have 2 shares. However, the cumulative value of these shares is equal to the 1 share each held before the split, so is the dividend.

    If dividend for 1 share = $0.10 in dividend

    with a 2-for-1 stock split, each share should earn a minimum dividend of (0.10 / 2 = $0.05) to avoid sending bad signals to investors
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