Final answer:
When a firm issues a small stock dividend greater than the par value, (a) shareholders' equity may increase,
(b) retained earnings decrease, (c) total market value of equity typically stays the same, (d) the company's market capitalization does not increase, and (e) dilution of ownership occurs for existing shareholders.
Step-by-step explanation:
Effects of Issuing a Small Stock Dividend
When a firm issues a small stock dividend and the market price of the stock is greater than its par value, the following can be observed:
- Shareholders' equity may increase due to the capitalization of retained earnings.
- Retained earnings decrease because the value of the dividend issued is transferred from retained earnings to shareholders' equity.
- The total market value of equity may initially remain the same, as the dividend does not change the total value, but redistributes it across more shares.
- The company's market capitalization does not automatically increase due to a stock dividend; it generally remains the same as before the dividend issuance.
- A dilution of ownership occurs for existing shareholders as more shares are introduced without an additional infusion of capital.
Overall, the main effect of a small stock dividend when the market price is greater than the par value is the redistribution of the company's equity among a greater number of shares, affecting the shareholders' ownership percentage but not the overall market capitalization.