Question 4 OR (a)

Short notes: stock split and scrip dividend

6 marks

Time to write: About 12 minutes
Topic: Dividend theories and dividend policy

Question

Question 4 OR (a) · 6 marks

Write short notes on the following:

Stock-Split
Scrip- Dividend (3×2)

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

(i)–(ii)2 items, each marked on its own: give each its share.
short notesA note opens with the meaning, then two or three key points. No long introduction.

Write it in this order

The parts stand alone: start with the one you are surest of.

Read; underline the asks; jot your points 1 min
1 Stock split: meaning, purpose, advantages and limitations 3 marks 5 min
2 Scrip dividend: meaning, use and effect 3 marks 5 min
Check: every ask answered, key terms underlined 1 min

Easy marks

Each note opens with the meaning: a one-line definition, the quickest mark in each.

Short on time? A few lines on every part beat a full answer to one: each part is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

(i) Stock split

Meaning. A stock split divides one share into several shares of smaller face value, for example one share of ₹500 into five shares of ₹100. The share capital, reserves and the shareholders' proportionate holdings do not change; only the number of shares rises and the face value falls in proportion.
Purpose. It is a tool for regulating the price of the share. When the market price rises beyond a limit, the share becomes less tradable and goes out of the reach of many investors; splitting brings the price back into a popular range.
Advantages. It makes the share affordable to small investors, and the larger number of shares may widen the shareholder base and the potential for investment.
Limitations. It costs money to carry out, and a low share price may attract speculators and short-term traders, whom companies generally do not prefer.
Not a dividend. A split distributes nothing: no cash leaves the firm and no reserve is capitalised, which is how it differs from a bonus issue.

(ii) Scrip dividend

The study material cited here lists the forms in which a dividend may be paid as cash or bonus shares; it does not define a scrip dividend, so the note below gives the standard meaning.

Meaning. A scrip dividend is a dividend declared out of profits but paid by issuing scrips: transferable promissory notes (or certificates) promising payment of the dividend at a stated future date, sometimes with interest, instead of paying cash now.
When used. By a company that has earned profits but is short of cash at the time, for example because funds are locked in stock or receivables, and that wants to keep up its record of paying dividends.
Effect. The dividend becomes a current liability of the company until the scrips are honoured. The shareholder can hold the scrip until it matures or sell it in the market for immediate cash.
Assessment. It preserves the company's liquidity in the short run, but it signals a cash shortage to the market and adds a fixed future payment, so it is used only occasionally.

Where the 6 marks sit

#	Component	Marks
1	Stock split: meaning, purpose, advantages and limitations	3
2	Scrip dividend: meaning, use and effect	3
	Total	6

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