Sauro Brothers Inc. is currently considering declaring a dividend to its common shareholders, according to one of the following plans:

1. Declare a cash dividend of $10 per share.

2. Declare a 20% stock dividend. Sauro Brothers would distribute one common share for every five common shares currently held. The company’s common shares are currently selling for $20 per share. Sauro Brothers is authorized to issue 125,000 common shares. To date, the company has issued 75,000 shares at $10 per share and is currently holding 5,000 of these as treasury shares.

Required

a. How many common shares are eligible to receive a dividend?

b. Prepare the entries necessary on the date of declaration, date of record, and date of payment of the cash dividend.

c. Prepare the entry to record the stock dividend, assuming that the dividend is declared and the shares are issued on the same date.

d. Describe how each dividend would affect Sauro’s debt/equity ratio.

e. Which of the two dividends would you, as an investor, prefer to receive? Why?