Flambeau Corporation has paid 60 consecutive quarterly cash dividends (15 years' worth). The last six 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 that is only enough to meet day-to-day operating needs, the president, Vince Ramsey, has decided that a stock dividend instead of a cash dividend should be declared. He tells Flambeau's financial vice-president, Janice Rahn, to issue a press release stating that the company is extending its consecutive dividend record with the declaration of a 5% stock dividend. "Write the press release convincing the shareholders that the stock dividend is just as good as a cash dividend," he orders. "Just watch our share price 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) What is the effect of a stock dividend on a corporation's shareholders' equity accounts?
(c) Will the share price rise if a stock dividend is declared, as the president expects?
(d) Is there anything unethical about President Ramsey's intentions or actions?
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