How to Calculate the Capitalization of Retained Earnings for a Small Stock Dividend

Companies transfer equity to capital stock to retain earnings.

Companies transfer equity to capital stock to retain earnings.

When a business sees a net profit, it usually distributes these earnings among shareholders. It can, however, instead retain a portion of the earnings, capitalizing the profits to invest in further development. Rather than a cash dividend, stockholders receive a small stock dividend, which gives each of them more equity. The capitalization of retained earnings is a measure that describes this new stock as a percentage of the company's total existing outstanding shares.

Divide the earnings that the company retains by the price of a single stock share. For example, if a company whose stock sells at $20 per share retains $10,000 in earnings, divide $10,000 by 20 to get 500 new shares of stock.

Divide the numbers of shares in the stock dividend by the number of outstanding shares. For example, if investors already own 5,000 shares of the company, divide 500 by 5,000 to get 0.10.

Multiply this answer by 100. With this example, multiply 0.10 by 100 to get 10. In the example, the company pays shareholders a 10-percent small stock dividend.

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