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?