Exercises BYP10-1 and BYP11-10 - Essay Example

‘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.’ There is nothing unethical about President Mailor’s actions, as declaring dividends are at the sole discretion of the company. Moreover, Greenwood has paid out cash dividends for over 15 years, when the company was doing better in terms of cash as well as earnings.

At the time of crisis, where there is only enough liquid assets to take care of day - to – day operational activities, the decision taken by President Mailor is very reasonable. When stock dividends are declared, the stockholders are given additional stocks based on the number of stocks originally held by them. If this involves, adding new shares to the company, then the total number of stocks are increased; however the value of the stock is reduced, so that the total stockholders’ equity remains the same.

Hence a stock dividend increases the number of stocks whereas the total value of stockholder equity is unchanged. As a stockholder, a cash dividend is preferred, as it is paid out immediately and adds value to the stockholder. However a stock dividend is of lesser value to the stockholder, as it just increases the number of stocks held and does not add value immediately. The stock dividend appreciates only when the value of the company goes up in the future. But there is also a possibility of the company’s value going down.

Hence a cash dividend is more preferred by the