An investor holds 1,000 shares of a publicly traded Canadian corporation. The company declares a stock dividend of 5%. If the current market price of the stock is $40 per share, what is the immediate impact on the investor's total capital investment, assuming no other transactions?

Question: An investor holds 1,000 shares of a publicly traded Canadian corporation. The company declares a stock dividend of 5%. If the current market price of the stock is $40 per share, what is the immediate impact on the investor's total capital investment, assuming no other transactions?

Answer options:

• The investor will receive 50 additional shares, and the market value of their total holding will increase by $2,000. ✅ The investor will receive 50 additional shares, and while the number of shares increases, the market value per share will likely adjust downwards, resulting in no immediate change to the total capital investment.
• The company will pay $2,000 in cash to the investor.
• The shares will split, and the investor will have 2,000 shares with a market value per share of $20.

Correct answer: The investor will receive 50 additional shares, and while the number of shares increases, the market value per share will likely adjust downwards, resulting in no immediate change to the total capital investment.

Explanation: A stock dividend increases the number of shares an investor owns (1,000 * 5% = 50 additional shares). However, it does not change the company's total equity or market capitalization. Consequently, the market price per share is expected to decrease proportionately, resulting in no immediate change in the total market value of the investor's holding.