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Cash dividend vs stock dividend

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Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months have been a real cash drain on the company, however, 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, Gil Mailor, has decided that a stock dividend instead of a cash dividend should be declared. He tells Greenwood's financial vice-president, Vicki Lemke, 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."

a.) Who are the stockholders in this situation?
b.) Is there anything unethical about president Mailor's intentions or actions?
c.) What is the effect of a stock dividend on a corporations stockholder's equity accounts? Which would you rather receive as a stockholder- a cash dividend, or a stock dividend? Why?

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Solution Preview

Green Wood Corporation has been continuously paying cash dividend to its shareholders. However, in the present financial year, the company's profit is reduced considerably and there is cash drain in the company .Therefore, the president of the company Gil Mailor wants to issue the stock dividend in lieu of cash dividend. The company cannot issue the stock dividend in lieu of cash dividend .The company can do so only if there is specific approval from the shareholders in their General Meeting Here, Gil Mailor is ordering the Vice -president to issue the press release that the company is maintaining the record of paying the dividend by issue of stock dividend this year is misleading and the press release containing the information that a stock dividend is equivalent to cash dividend is unethical. Issuing stock dividend is not unethical but issuing the same in lieu of cash dividend and creating the false impression that ...

Solution Summary

The answer contains ethical issues involved in issuing stock dividend in lieu of cash dividend,stakeholders involved in this issue and the effect of issue of stock dividend and cash dividend in the stockholders' equity accounts.