In 2018, you purchased 10,000 common shares of your friend’s company, Kingston Technologies Inc., at a market price of $25.00 per share. On December 31, 2020, the company reported the following information about their shareholders’ equity:

Common shares, 200,000 shares issued and outstanding ............. $2,000,000
Retained earnings .................................................................................. 1,200,000
Total shareholders’ equity .................................................................. $3,200,000

In the past, Kingston Technologies Inc. has paid an annual cash dividend of $2.00 per share. In 2019, despite a large Retained Earnings balance, the board of directors wanted to conserve cash for expansion and did not pay a cash dividend but distributed a 10 percent stock dividend. During 2020, the company’s cash position improved, so the board declared and paid a cash dividend of $1.50 per share.

Required

1. How did the stock dividend affect your proportionate ownership in the company? Explain.

2. What amount of cash dividends did you receive in 2018? What amount of cash dividends did you receive in 2020? Would you expect the dividend per share to remain unchanged between 2018 and 2020?

3. Immediately after the stock dividend was distributed, the market value of Kingston Technologies Inc. shares decreased from $25.00 per share to $22.72 per share. Does this represent a loss to you? Explain.

4. Suppose Kingston Technologies Inc. announces at the time of the stock dividend that the company will continue to pay the annual $2.00 cash dividend per share, even after the stock dividend. Would you expect the market price of the shares to decrease in 2019 to $22.72 per share as in Requirement 3 above? Explain.