Cikan Designs Inc. has paid quarterly cash dividends since 2001. These dividends have steadily increased from $0.02 per share to the latest dividend declaration of $0.40 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 2012 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 2012.

On November 1, 2012, Cikan Designs Inc. borrowed $3,600,000 from Metro 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 Cikan Designs Inc. to:

a. Pay monthly interest on the last day of the month.

b. Pay $360,000 of the principal each November 1, beginning in 2013.

c. Maintain a current ratio (current assets/current liabilities) of 2.

d. Maintain a minimum balance (a compensating balance) of $100,000 in its Metro National Bank account.

On December 31, 2012, $900,000 of the $3,600,000 loan had been disbursed in modernization of the retail stores and in expansion of the product line. Cikan Designs Inc.'s balance sheet as of December 31, 2012, is shown below.

The board of directors is scheduled to meet January 8, 2013, to discuss the results of operations for 2012 and to consider the declaration of dividends for the fourth quarter of 2012. 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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Cikan Designs Inc. Balance Sheet December 31, 2012 Assets Current assets: 250,000 2,700,000 Accounts receivable. . . 700,000 Less allowance for doubtful accounts... Merchandise inventory . . 50,000 650,000 2,680,000 20,000 6,300,000 Total current assets Property, plant, and equipment: 500,000 1140,000 3,610,000 730,000 ,590,000 $4,750,000 Less accumulated depreciation····..··.. 5,700,000 $12,000,000 Total assets... Liabilities Current liabilities: 360,000 10,000 1,800,000 Long-term liabilities: 3,240,000 Total liabilities . .. . $ 5,040,000 Stockholders Equity Paid-in capital: Common stock, $25 par (200,000 shares authorized, 180,000 shares issued) $4,500,000 270,000 Excess of issue price over par.. .. . . . .. Total paid-in capital.... $4,770,000 2,190,000 Retained earnings... . 6,960,000 $12,000,000