I give my thanks to Lion Investor to illustrate this example to everyone. What he focus on is the effect of scrip dividends on you as an investor and MIIF as a whole.
First, a recap of the default scenario.
Stock A has 10,000 shares in circulation and the net tangible assets of the company is $10,000. The market price of each share is $1. Thus, the share is trading at NTA price.
$1 of asset can produce $0.05 in earnings so initially, the $10,000 that the company has produces $500 in profits.
The issue price of the scrip dividend is $1 per share.
You own 1000 shares of the company. Earnings attributable to you is $50.
We will only consider the case where you are the only one taking up the scrip dividend and the company is able to reinvest the excess cash to produce the same rate of return.
Total shares in issue is now 10050 shares and you own 1050 shares of the company. Company assets have gone up to $10050.
For the next period, earnings per share is $0.05 and your share of the earnings will be $52.50. It has compounded at 5%.
Now, let us consider 2 more cases:
- Share price trading at 50% discount to NTA
- Share price trading at 200% of NTA
[Read More | Den of the Lion | MIIF Dividend Reinvestment]