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.”
Instructions
(a) Who are the stakeholders 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 corporation’s stockholders’ equity accounts?
Which would you rather receive as a stockholder—a cash dividend or a stock dividend?
Why?
(a) The stakeholders in this situation are:
1. Stockholders: These are the owners of the company's stock and have an interest in maximizing the value and returns on their investment.
2. President Gil Mailor: He is responsible for making decisions that affect the company and its stakeholders.
3. Financial Vice President Vicki Lemke: She is in charge of managing the company's finances and implementing the president's directive.
4. Employees: They have an interest in the financial health of the company as it affects their job security and potential for growth and benefits.
5. Competitors: They are affected by Greenwood Corporation's decisions and actions in the competitive market.
(b) President Mailor's intentions and actions may be considered unethical for several reasons:
1. Misleading communication: By stating that the stock dividend is just as good as a cash dividend, the president may be intentionally deceiving stockholders and misleading them about the true financial health and situation of the company.
2. Manipulating stock value: The president's expectation that the stock price will rise when the stock dividend is announced indicates a potential intention to artificially inflate the value of the company's stock, which is misleading and can harm investors.
3. Failing to address the financial challenges: Instead of actively dealing with the financial challenges the company is facing, President Mailor opts for a cosmetic solution of a stock dividend to maintain the consecutive dividend record, which can be seen as avoiding the real issues at hand.
(c) The effect of a stock dividend on a corporation's stockholders' equity accounts is to redistribute a portion of retained earnings into additional shares of stock. This can result in a decrease in the per-share stock price, as the number of shares outstanding increases. However, the total value of the stockholders' equity remains the same.
As a stockholder, whether I would prefer a cash dividend or a stock dividend depends on my individual circumstances and financial goals. Here are some considerations:
1. Cash dividend: If I need immediate cash flow, such as for living expenses or other financial obligations, a cash dividend would be more beneficial as it provides immediate liquidity.
2. Stock dividend: If I am not in immediate need of cash and believe in the long-term potential of the company, a stock dividend may be preferred. It increases the number of shares owned, potentially giving me a larger ownership stake in the company and the opportunity for greater future dividends and capital gains if the stock price rises.
Ultimately, the decision between a cash dividend and a stock dividend is subjective and depends on the individual preferences, financial goals, and circumstances of each stockholder.