confusing question on increased shareholder wealth

We are asked to pick the situation where shareholder wealth increases , but all of them seem wrong for various reasons.

A) a stock dividend

B) a stock split

C) a special dividend

A is wrong because a the shareholder’s stock lowers in value, and he gets the cash to compensate. Neutral effect.

B could be right or wrong depending on how you argue it. At first I argued that a stock split would increase demand for shares because a lower price meant more accessibility for odd lots/amateur investors. I could also argue that a higher share price would now allow certain fund managers to invest in the stock (I guess some people have rules against investing in companies if the share price is too low). The textbook did make a comment that lower share prices meant a higher transaction cost %. Why would they say that?

If Joe Average opens up his IRA at Schwab and makes a $10,000 trade. He’s gonna get charged the same $9.99 commission whether he buys 20 shares of GOOG at $500/share, or whether he buys 105 shares of Exxon at $95/share.

C) Finally, C looks wrong for the same reason as A: because a cash dividend should be counterbalanced by a drop in share value.


Which one is right?

Both A and B simply give the shareholders more shares, but it’s done proportionately, and the new share value is lower, reflecting the greater number of shares; nothing’s changed but the denominations of the paper you hold. (You have a $5 and I replace it with five $1s.)

C could be correct; generally companies issue special dividends when they’re growing, so the decline in share price may be less than the value of the cash paid in the special dividend. It’s not certain to be true, but A and B are certain to be false.

C was the right answer according to the book’s quix, but there was text that confirmed my interpretation of B. I just hope the real exam doesn’t curveballs like this. Thanks again.

You’re welcome.

S2000, are you a contributing author or editor for the very books I’m reading? I’m wondering if you’re allowed to use these forums as a “consumer feedback” when you make proposals to changes in content or changes in wording.

I’ve written up a couple of readings for Schweser and for Stalla at Levels II and III, but nothing at Level I.