Final answer:
The subject focuses on stock dividends in business, where companies distribute a portion of their profits to shareholders based on the number of shares they own, and on capital gains, which are profits from selling stock at a higher price than it was purchased. The example provided explains how a company disburses stock dividends by transferring the market value of the distributed shares from retained earnings to shareholders' equity.
Step-by-step explanation:
The discussion focuses on the concept of stock dividends, which are payments made by a company to its shareholders out of its profits. When a company pays dividends, it is distributing a percent of the profits to the stock owners. The amount each shareholder receives is directly proportional to the number of shares they own. For example, if a dividend is 75 cents per share, a person owning 85 shares would receive a total dividend payment accordingly.
Beyond dividends, investors also seek a return on investment through capital gains, which occur when the value of stock increases and the stock is sold for a profit. For instance, buying a stock at $45 and selling it later for $60 would result in a capital gain of $15 per share. Understanding these concepts is vital for investors and those participating in the stock market to maximize their returns and make informed decisions.
When a firm issues stock dividends, it must transfer the equivalent market value from its retained earnings to the shareholders' equity. In the given scenario, if 800 shares are distributed as a 2% stock dividend from 40,000 outstanding shares, and the market price per share is $11, the total value transferred would be $8,800.