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Chapter 8
Solution
The answer is (B).
In theory, shareholder wealth is unaffected by a scrip dividend.
Consider a typical shareholder with 120 shares. Under the terms of the scrip
dividend, this shareholder would receive an entitlement to one new share for
every 12 held. That is, the right to acquire 10 new shares (where 10 = 120/12).
This may give the shareholder the illusion of increased 'value' as he now holds
130 shares. However, the company itself has not changed in value and so the
total value that those shares represent is unchanged.
Therefore, the value of each share after the scrip issue will be ($1.90 × 120)/
130 = $1.75.
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