FORMS OF DIVIDEND
Many Companies pay dividend in cash. Often cash dividend may be supplemented by a bonus issue (stock dividend). When the company chooses a stable dividend policy, it must be prepare a cash budget for the coming period to point out the essential funds, to meet regular dividend payments of the company. The cash account and the reserves account of a company will be reduced when the cash dividend is paid. Thus, both of the total assets and the net worth of the company are reduced when cash dividend is distributed. The market price of the share drops in most cases by the amount of cash dividend distributed.
Stock Dividend (Bonus Shares)
A stock dividend defines a distribution of shares in lieu of or as well as to the cash dividend to the existing shareholders. The announcement of stock dividend will raise the equity share capital and reduces the reserves and surplus (retained earnings) of the company. The declaration of stock dividend does not affect the total net worth or the wealth of shareholders. The EPS and market price per share will fall proportionately to the bonus issue. But in proportion to earnings of shareholders will continue unchanged.
A stock split is a technique to increase the no. of outstanding shares via proportional reduction in the par value of the shares. With stock split, the total net worth does not modify and the no. of outstanding shares increases with dilutions in EPS and a proportionate fall in the market price of a share. This technique is usually used to lesser the market price of a firm's stock by increasing the number of shares belonging to every shareholder in the order to increase the trading of the shares.
Under the condition of falling price of a company's share, the company may want to decrease the number of outstanding shares to enhance the market price for each share. The reduction of the number of outstanding shares by increasing for each share per value is known as Reverse split.
It is the Repurchasing by the firm of outstanding shares of its common stock in the market place.