Accounting

Instructions

Interworld Distributors has paid quarterly cash dividends since 1985. The dividends have steadily increased from $.25 per share to the latest dividend declaration of $2.00 per share. The board of directors is eager to continue this trend despite the fact that revenues fell significantly during recent months as a result of worsening economic conditions and increased competition. The company founder and member 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 lieu of our regular $2.00 per share cash dividend, Interworld will distribute a 5% stock dividend on its common shares, currently trading at $40 per share. Changing the form of the dividend will permit the Company to direct available cash resources to the modernization of physical facilities in preparation for competing in the 21st century."Step 1:  State the factsStep 2: What are the ethical issues and who are the stakeholders?Step 3: What values are at stake?Step 4: What are the alternatives?Step 5: Evaluate the alternatives in terms of valuesStep 6: What are the consequences?Step 7: Make a decision. What should the company do?

Answer

Step 1 - The Facts:The company hopes to keep providing dividends to shareholders despite the recent revenue decline. The founder and board member, in his speech, offered that the company should offer a 5% stock dividend instead of the normal $2.0 per cash dividend, with the stocks currently retailing at $40 per unit. This approach is cited to allow the company to plough back cash in an effort to digitize its operations to match the 21st century competition. Particularly, the shareholder ownership value and percentage would remain the same despite the reduction in remitted dividends. With the chosen approach, the overall redistribution of small stock dividend would lead to the reclassification of the earnings that are retained and the creation of an illusion that shareholders would be earni...
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