Sentinel Inc. has paid quarterly cash dividends since 1995. These dividends have steadily increased from \(\$ 0.05\) per share to the latest dividend declaration of \(\$ 0.40\) 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 2008 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 2008 .
On November 1, 2008, Sentinel Inc. borrowed \(\$ 800,000\) from American 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 Sentinel Inc. to:

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

b. Pay \(\$ 80,000\) of the principal each November 1, beginning in 2009.

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

d. Maintain a minimum balance (a compensating balance) of \(\$ 40,000\) in its American \(\mathrm{Na}-\) tional Bank account.
On December 31, 2008, \(\$ 200,000\) of the \(\$ 800,000\) loan had been disbursed in modernization of the retail stores and in expansion of the product line. Sentinel Inc.'s balance sheet as of December 31, 2008, is shown at the top of the following page.
The board of directors is scheduled to meet January 6, 2009, to discuss the results of operations for 2008 and to consider the declaration of dividends for the fourth quarter of 2008. 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.objs. 2, 3, 4, 6

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Sentinel Inc: Balance Sheet December 31, 2008 Assets Current assets: Cash Marketable securities Accounts receivable 64,000 600,000 $ 146,400 Less allowance for doubtful accounts 10,400 136,000 200,000 7,200 $1,007,200 Merchandise inventory Prepaid expenses Total current assets.. Property, plant, and equipment: Land Buildings Less accumulated depreciation Equipment. Less accumulated depreciation Total property, plant, and equipment Total assets Current liabilities: Accounts payable Notes payable (American National Bank) Salaries payable Total current liabilities Long-term liabilities: Notes payable (American National Bank) Total liabilities Liabilities $ 240,000 $1,520,000 344,000 1,176,000 $ 736,000 176,000 560,000 1,976,000 $2,983,200 $ 114,880 80,000 5,120 $ 200,000 720,000 $ 920,000