Intercontinental Clothing Distributors has paid cash dividends every year since the company was founded in 1990. The dividends have steadily increased from $0.05 per share to the latest dividend declaration of $1.00 per share. The board of directors is eager to continue this trend despite the fact that earnings fell significantly during the recent quarter as a result of worsening economic conditions and increased competition. The chair of the board proposes a solution. She suggests a 5% stock dividend in lieu of a cash dividend, to be accompanied by the following press announcement: “In place of our regular $1.00 per share cash dividend, Intercontinental will distribute a 5% stock dividend on its common shares, currently trading at $20 per share. Changing the form of the dividend will permit the company to direct available cash resources to the modernization of facilities in order to better compete in the 21st century.” Is a 5% stock dividend equivalent to a $1.00 per share cash dividend when shares are trading at $20 per share? Is the chair's suggestion ethical?
In this case, we see the problem is whether we choose cash dividend or stock dividend. But before we made our decision we must have to understand that neither cash nor stock dividend changes the shareholder’s net worth in the company (table). So 5% stock dividend equivalent to a $1.00 per share cash dividend when shares are trading at $20 per share. Cash dividend is a payment made by a company out of its earnings to shareholders in the form of cash. Pros: transfers economic value from the company to the shareholders instead of the company using the money for operations. Cons: It cause the company’s share price to drop by roughly the same amount as the dividend. For example, if a company issues a cash dividend equal to 5% of the stock price, shareholders will see a resulting loss of 5% in the price of their shares. Tax pay immediately on their value distribution.
Stock dividend – is an increase in...
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