Matterhorn Inc. has paid quarterly cash dividends since 1993. These dividends have steadily increased from $0.05 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 2007 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 2007.
On November 1, 2007, Matterhorn Inc. borrowed $400,000 from Cheyenne 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, 12% loan require Matterhorn Inc. to:
a. Pay monthly interest on the last day of the month.
b. Pay $40,000 of the principal each November 1, beginning in 2008.
c. Maintain a current ratio (current assets ÷ current liabilities) of 2.
d. Maintain a minimum balance (a compensating balance) of $20,000 in its Cheyenne National Bank account.
On December 31, 2007, $100,000 of the $400,000 loan had been disbursed in modernization of the retail stores and in expansion of the product line. Matterhorn Inc.€™s balance sheet as of December 31, 2007, is as follows:

The board of directors is scheduled to meet January 6, 2008, to discuss the results of operations for 2007 and to consider the declaration of dividends for the fourth quarter of 2007. 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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Matterhorn Inc Balance Sheet December 31, 2007 Assets Current assets: Cash Marketable securities Accounts receivable 32,000 300,000 73,200 5,200 Less allowance for doubtful accounts Merchandise inventory Prepaid expenses 68,000 100,000 3,600 Total current assets S 503,600 Property, plant, and equipment: Land Buildings $120,000 760,000 172,000 $368,000 88,000 Less ac cumulated depreciation 588,000 Equipment Les s accumulated depreciation Total property, plant, and 280,000 equipment 988,000 Total assets 1,491,600 Liabilities Current liabilities: Accounts payable Notes payable (Cheyenne National Bank) Salaries payable 57,440 40,000 2,560 Total current liabilities 100,000 Long-term liabilities: 360,000 460,000 Notes payable (Cheyenne National Bank) Total liabilities Stockholders' Equity Paid-in capital Common stock, $20 par (50,000 shares authorized, 20,000 shares issued) $400,000 32,000 Excess of issue price over par Total paid-in capital $432,000 599,600 Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 1,031,600 $1,491,600