Effect of Stock Dividend Travanti Company has a history of paying cash dividends on its common stock. Although the fi rm has been profi table this year, the board of directors is planning construction of a second manufacturing plant. To reduce the amount that they must borrow to fi nance the expansion, the directors are contemplating replacing their usual cash dividend with a 40% stock dividend. The board is unsure about a stock dividend’s effect on the company’s balance sheet and has requested your assistance.

Required 1. Write a statement to explain the effect the stock dividend has on the fi nancial statements of Travanti Company.

2. A group of common stockholders has contacted the fi rm to express its concern about the effect of the stock dividend and to question the effect the stock dividend may have on the market price of the stock. Write a statement to address the stockholders’ concerns.

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