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Unformatted text preview: ty of the company. However, the balance in the retained earnings
account goes down and common stock and additional paidin capital account balances go up. Thus, the
debt/equity ratio remains unchanged after the issuance of stock dividends. P12–4
e. Concluded Stockholders would generally prefer a cash dividend over a stock dividend. Assume that you own 1,300
shares of Royal Company's common stock prior to any dividend. Since there are 47,000 shares
outstanding, you own 3% of the company. In addition, since each share is worth $50, the total value of
your investment is $65,000. Since the company's financial position would not be expected to improve or
worsen simply from declaring a stock dividend, the total value of your investment should still be worth
$65,000. Thus, it appears that receiving a stock dividend has not improved your wealth. To the extent that
Royal Company cannot declare and pay dividends in excess of its balance in Retained Earnings, a stock
dividend may even decrease your wealth. By declaring a stock divid...
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