Question

Motion Designs Inc. has paid quarterly cash dividends since 2003. These dividends have steadily increased from $0.05 per share to the latest dividend declaration of $0.50 per share. The board of directors would like to continue this trend and is hesitant to suspend or decrease the amount of quarterly dividends. Unfortunately, sales dropped sharply in the fourth quarter of 2014 because of worsening economic conditions and increased competition. As a result, the board is uncertain as to whether it should declare a dividend for the last quarter of 2014.
On October 1, 2014, Motion Designs Inc. borrowed $4,000,000 from Valley National Bank to use in modernizing its retail stores and to expand its product line in reaction to its competition. The terms of the 10-year, 6% loan require Motion Designs Inc. to:
a. Pay monthly interest on the last day of the month.
b. Pay $400,000 of the principal each October 1, beginning in 2015.
c. Maintain a current ratio (current assets/current liabilities) of 2.
d. Maintain a minimum balance (a compensating balance) of $100,000 in its Valley National Bank account.
On December 31, 2014, $1,000,000 of the $4,000,000 loan had been disbursed in modernization of the retail stores and in expansion of the product line. Motion Designs Inc.'s balance sheet as of December 31, 2014, is shown below.


Liabilities


The board of directors is scheduled to meet January 10, 2015, to discuss the results of operations for 2014 and to consider the declaration of dividends for the fourth quarter of 2014. The chairman of the board has asked for your advice on the declaration of dividends.
1. What factors should the board consider in deciding whether to declare a cash dividend?
2. The board is considering the declaration of a stock dividend instead of a cash dividend. Discuss the issuance of a stock dividend from the point of view of
(a) A stockholder and
(b) The board ofdirectors.


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  • CreatedFebruary 28, 2014
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