Bonus share issues and share splits: Split-Div Ltd has issued quarterly dividends of $0.10 per share each quarter over the last few years. This quarter Split-Div initiated a 2-for-1 share split. What is the minimum quarterly dividend the board of Split-Div should approve to avoid sending a bad signal to investors?
A) $0.02 per share
B) $0.05 per share
C) $0.10 per share
D) $0.20 per share

Question

Quizplus · Accepted Answer

A share split does not affect the company's earnings or its ability to pay dividends. The purpose of a share split is to increase the number of shares outstanding and reduce the stock price per share, which can make the shares more affordable and increase liquidity. Therefore, the % of earnings paid out as dividends should remain the same after the share split.

In this case, a 2-for-1 share split means that each shareholder will receive two shares for every one share they previously held, effectively doubling the number of shares outstanding. To avoid sending a bad signal to investors, the company should maintain the same dividend per share after the split, which means cutting the dividend in half.

Therefore, the minimum quarterly dividend the board of Split-Div should approve is $0.05 per share ($0.10 per share divided by 2). Choice B is the correct answer.

Bonus Share Issues and Share Splits: Split-Div Ltd Has Issued