Explain the expected impact on shareholder wealth and on a company's financial ratios of cash dividends (regular, extra or liquidating), stock dividends, reverse stock splits and stock splits
The idea
In a frictionless market no payout changes shareholder wealth: a cash dividend moves value from the company to the holder, and the share price drops by about the dividend on the ex-date. Regular, extra (one-off) and liquidating dividends (a return of capital) all shrink cash and equity, so liquidity ratios such as the current and cash ratios fall while debt-to-equity and debt-to-assets rise. Stock dividends, splits and reverse splits only change the share count: price per share moves inversely, a 10% stock dividend divides the price by 1.10, and market value, wealth and balance-sheet ratios are unchanged, while per-share figures such as EPS, DPS and book value per share adjust for the new share count. The trap is treating a stock dividend as a cash transfer, or forgetting that a cash dividend also lowers equity.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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