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Dear sir,
I am having some problems about paying dividend by ordinary shares.According to a lot of literature, issuing common shares to existing shareholders does not dilute the ownship and shareholder’s rights, it is known as a way to increase owner equity.
But actually there is no new cash flow got into the firm, how can it increase the owner equity? Could you please give me an explanation to help to overcome this issue.
Thank you.
There is no increase in owner equity as the new dividend shares to be issued taken from retained earnings. Total owner equity do not change!
quytuan: Please do not answer in this forum – it is Ask the Tutor forum (but please do help people in the other F9 forum 🙂 )
chungtinhnguyen: It does increase the owner equity. It is as though the company paid a cash dividend and then the shareholder used the cash to buy more shares.
The shareholder ends up with more shares than if there had been a cash dividend, and this is what is mean by their equity increasing.
The total shareholders funds on the SOFP will not change (although it will be higher than if a cash dividend had been paid), but in F9 we are not interested particularly in the SOFP values. Shareholders end up with more shares, and the company has more cash than it would have had if it had paid a cash dividend and can use that cash to grow the company.
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