Intercontinental Clothing Distributors has paid cash dividends every year since the company was founded in...
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Intercontinental Clothing Distributors has paid cash dividends every year since the company was founded in 1990. The dividends have steadily increased from $0.05 per share to the latest dividend declaration of $1.00 per share. The board of directors is eager to continue this trend despite the fact that earnings fell significantly during the recent quarter. The chair of the board proposes a solution. He suggests a 5% stock dividend in lieu of a cash dividend, to be accompanied by the following press announcement: In place of our regular $1.00 per share cash dividend, Intercontinental will distribute a 5% stock dividend on its common shares, currently trading at $20 per share. Changing the form of the dividend will permit the company to direct available cash resources to the modernization of facilities and other capital improvements.
Is a 5% stock dividend on shares trading at $20 per share equivalent to a $1.00 per share cash dividend? Is the chairs suggestion ethical?
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