Dividends Motion Designs Inc. has paid quarterly cash dividends since 2005. These dividends have steadily increased from $0.05 per share to the latest dividend declaration of $0.50 per share. The board of directors would like to continue this trend and is hesitant to suspend or decrease the amount of quarterly dividends. Unfortunately, sales dropped sharply in the fourth quarter of 2016 because of worsening economic conditions and increased competition. As a result, the board is uncertain as to whether it should declare a dividend for the last quarter of 2016.

On October 1, 2016, Motion Designs Inc. borrowed $4,000,000 from Valley National Bank to use in modernizing its retail stores and to expand its product line in reaction to its competition. The terms of the 10-year, 6% loan require Motion Designs Inc. to:

a. Pay monthly interest on the last day of the month.

b. Pay $400,000 of the principal each October 1, beginning in 2017.

c. Maintain a current ratio (current assets ÷ current liabilities) of 2.

d. Maintain a minimum balance (a compensating balance) of $100,000 in its Valley National Bank account.

On December 31, 2016, $1,000,000 of the $4,000,000 loan had been disbursed in modernization of the retail stores and in expansion of the product line. Motion Designs Inc.’s balance sheet as of December 31, 2016, follows:
Motion Designs Inc.
Balance Sheet December 31, 2016 Assets Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000 Marketable securities . . . . . . . . . . . . . . . . . . . . . 3,000,000 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . $ 800,000 Less allowance for doubtful accounts . . . . 50,000 750,000 Merchandise inventory . . . . . . . . . . . . . . . . . . . . 2,980,000 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Total current assets . . . . . . . . . . . . . . . . . . . . . $ 7,000,000 Property, plant, and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500,000 Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,050,000 Less accumulated depreciation . . . . . . . . . . 1,140,000 3,910,000 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,320,000 Less accumulated depreciation . . . . . . . . . . 730,000 2,590,000 Total property, plant, and equipment . . . . . 8,000,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000,000 Liabilities Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,590,000 Notes payable (Valley National Bank) . . . . . . . 400,000 Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Total current liabilities . . . . . . . . . . . . . . . . . . $2,000,000 Long-term liabilities:
Notes payable (Valley National Bank) . . . . . . . 3,600,000 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,600,000 Stockholders’ Equity Paid-in capital:
Common stock, $25 par (200,000 shares authorized, 180,000 shares issued) . . . . . . . . $ 4,500,000 Excess of issue price over par . . . . . . . . . . . . . . . 270,000 Total paid-in capital . . . . . . . . . . . . . . . . . . . . . $4,770,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 4,630,000 Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . 9,400,000 Total liabilities and stockholders’ equity . . . . . . $15,000,000 The board of directors is scheduled to meet January 10, 2017, to discuss the results of operations for 2016 and to consider the declaration of dividends for the fourth quarter of 2016. The chairman of the board has asked for your advice on the declaration of dividends.
1. What factors should the board consider in deciding whether to declare a cash dividend?
2. The board is considering the declaration of a stock dividend instead of a cash dividend. Discuss the issuance of a stock dividend from the point of view of

(a) a stockholder and

(b) the board of directors.