Stock Dividends vs. Cash Dividends

ABC Corporation has paid 60 consecutive quarterly cash dividends (15 years).The last 6 months, however, have been a cash drain on the company, as profit margins have been greatly narrowed by increasing competition.With a cash balance sufficient to meet only day-to-day operating needs, the president, Jim Smith, has decided that a stock dividend instead of a cash dividend should be declared.He tells ABC's financial vice president, Mary Johnson, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend."Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend," he orders."Just watch our stock rise when we announce the stock dividend.It must be a good thing if that happens."

INSTRUCTIONS

Answer the following questions:

• Who are the stakeholders in this situation?
• Is there anything unethical about Smith's intentions or actions?
• What is the effect of a stock dividend on a corporation's stockholders' equity accounts?
• Which would you rather receive as a stockholder - a cash dividend or a stock dividend?Why?