On January 1, 2011, Cozumel Company had 100,000 shares of $0.50 par value common stock outstanding. The

Question:

On January 1, 2011, Cozumel Company had 100,000 shares of $0.50 par value common stock outstanding. The market value of Cozumel’s common stock was $18 per share. Cozumel’s Retained Earnings balance on January 1 was $460,000. During 2010, Cozumel had declared and paid cash dividends of $0.75 per share. Net income for 2011 is expected to be $130,000. Cozumel has a large loan from McGraw Bank; part of the loan agreement stipulates that Cozumel must maintain a minimum Retained Earnings balance of $350,000.

Cozumel’s board of directors is debating whether to declare a stock dividend in addition to its $0.75 per share annual cash dividend. Three proposals have been presented:

(1) No stock dividend,

(2) A 10% stock dividend, and

(3) A 25% stock dividend.

Instructions:

As a shareholder in Cozumel Company, which of the three proposals do you favor? Support your answer.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...