The par value of stock is reduced when stock dividends are issued.

Question

Quizplus · Accepted Answer

The par value of stock is not necessarily reduced when stock dividends are issued. Instead, what typically happens is that the number of shares outstanding increases.When a company issues a stock dividend, it distributes additional shares of its stock to existing shareholders in proportion to the number of shares they already own. For example, in a 10% stock dividend, an investor holding 100 shares would receive an additional 10 shares. The total number of shares outstanding in the market increases, but the par value of each share remains the same.
The par value of a stock is an arbitrary value assigned to each share of stock in the company's charter and is not indicative of the market value of the stock. It is often set at a minimal amount, like $0.01 or $1.00, and does not change with stock dividends.
However, because the number of shares increases while the company's equity remains the same, the result is a dilution of the value of each share. This means that although the par value per share remains unchanged, the book value per share and possibly the market value per share may decrease as a result of the stock dividend, because the same amount of equity is now spread over a larger number of shares.
In summary, the par value of stock remains the same when stock dividends are issued, but the number of shares outstanding increases, which can dilute the value of each existing share.

The Par Value of Stock Is Reduced When Stock Dividends