Series6 Real Exam Prep DEMO

Question 10: Simple Simon owns 1,000 shares in the Pasty Pie Corporation, which has just declared a stock
dividend
of 5%.Just prior to this announcement, Pasty Pie was selling for $10 a share. This announcement will:
A. increase Pasty's shares outstanding and reduce Simple's proportionate ownership in the firm.
B. increase the number of shares that Simple owns to 1,050, which will increase the market value of
the
shares that he owns from $10,000 to $10,500.
C. increase the number of shares that Simple owns to 1,050, but this will not affect the market value
of
Simple's holdings.
D. increase Simple's cash by the amount of the dividend paid: 0.05 x $10 = $0.50 x 1,000 shares =
$500.
Correct Answer: C
Explanation: If Simple Simon owns 1,000 shares of Pasty Pie Corporation when Pasty declares a 5%
stock dividend, the stock dividend will increase his number of shares to 1,050, but it will not affect
the
market value of Simple's holdings since the market price per share will also decrease proportionately.
The
aggregate market value of the firm stays the same, but the number of shares outstanding increases,
resulting in a lower market value per share. Simple's proportionate ownership remains the same
because
his shares increased in the same percentage as the shares outstanding of the firm did. A stock
dividend
does not result in any cash payments to the shareholders.