As a bakery business continues to grow, cash flow has become more of a concern. The board of directors would like to maintain the market share price, so a discussion ensues about issuing a stock dividend versus a cash dividend. As a newly appointed board member you listen to the conversation and need to cast your vote. Which do you vote for: stock dividend or cash dividend?

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 14, Problem 6TP
Textbook Problem
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As a bakery business continues to grow, cash flow has become more of a concern. The board of directors would like to maintain the market share price, so a discussion ensues about issuing a stock dividend versus a cash dividend. As a newly appointed board member you listen to the conversation and need to cast your vote. Which do you vote for: stock dividend or cash dividend?

To determine

To select:

The casting vote for stock dividend or cash dividend.

Introduction:

Dividend is the sum of money which is regularly paid by the company after a specific period of time to its shareholders from the profits or reserves.

Explanation of Solution

The board member should cast the vote for stock dividend. As the company is growing, company would need more of cash for its future investments in the projects. These projects will earn profit and that will go to shareholders in the form of dividends. The shareholders will get more dividend in future because of increase in the number of shares due to stock dividend. So this decision would be ultimately in the benefit of shareholders.

Stock dividend will affect the market price of share, but it will not reduce the value of firm. If company uses money in profitable projects, then it can pay high dividend in future and that will increase the market price of firm as well as its value...

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