Stakeholders
A person, group or organization that has interest or concern in an organization. Stakeholders can affect or be affected by the organization's actions, objectives and policies. Some examples of key stakeholders are creditors, directors, employees,...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...

Question:

Molina Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months, however, have been a cash drain on the company, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only day-to-day operating needs, the president, Rob Lowery, has decided that a stock dividend instead of a cash dividend should be declared. He tells Molina’s financial vice president, Debbie Oler, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend.
“Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend,” he orders. “Just watch our stock rise when we announce the stock dividend. It must be a good thing if that happens.”

Instructions
(a) Who are the stakeholders in this situation?
(b) Is there anything unethical about Lowery’s intentions or actions?
(c) What is the effect of a stock dividend 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...
on a corporation’s stockholders’ equity accounts? Which would you rather receive as a stockholder—a cash dividend 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...
or a stock dividend? Why?


Answer:

 

(a)The stakeholders in this situation are:

 

„  Rob Lowery, president of Molina Corporation.

„  Debbie Oler, financial vice-president.

„  The stockholders of Molina Corporation.

 

(b)     There is nothing unethical in issuing a stock dividend. But the president’s order to write a press release convincing the stockholders that the stock dividend is just as good as a cash dividend is unethical. A stock dividend is not a cash dividend and does not necessarily place the stock­holder in the same position. A stock dividend is a “paper” dividend—the issuance of a stock certificate, not a check (cash).

 

(c)      The stock dividend results in a decrease in retained earnings and an increase of the same amount in paid-in capital with no change in total stockholders’ equity. There is no change in total assets and no change in total liabilities and stockholders’ equity.

          As a stockholder, preference for a cash dividend versus a stock dividend is dependent upon one’s investment objective—income (cash flow) or growth (reinvestment).