Sentinel Inc. has paid quarterly cash dividends since 1995. 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 2008 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 2008.
On November 1, 2008, Sentinel Inc. borrowed $800,000 from American 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 Sentinel Inc. to:
a. Pay monthly interest on the last day of the month.
b. Pay $80,000 of the principal each November 1, beginning in 2009.
c. Maintain a current ratio (current assets/current liabilities) of 2.
d. Maintain a minimum balance (a compensating balance) of $40,000 in its American National Bank account.
On December 31, 2008, $200,000 of the $800,000 loan had been disbursed in modernization of the retail stores and in expansion of the product line. Sentinel Inc.'s balance sheet as of December 31, 2008, is shown at the top of the following page.
The board of directors is scheduled to meet January 6, 2009, to discuss the results of operations for 2008 and to consider the declaration of dividends for the fourth quarter of 2008. 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
(b) The board ofdirectors.

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Sentinel Inc. Balance Sheet December 31, 2008 Assets Current assets: Cash Marketable securities 64,000 600,000 .. . Less allowance for doubtful accounts 10,400 136,000 200,000 7,200 Prepaid expenses $1,007,200 Property, plant, and equipment: S 240,000 344,000 ,176,000 176,000 500C Land .. . . Less accumulated depreciation _.... 560,000 Total property, plant, and equipment. 1,976,000 $2,983,200 Total assets. Liabilities Current liabilities: Notes payable (American National Bank) 80,000 5,120 S 200,000 Long-term liabilities: Notes payable (American National Bank) .. Total liabilities 720,000 920,000 Stockholders' Equity Paid-in capital Common stock, $20 par (50,000 shares Excess of issue price over par.......... 64,000 Total paid-in capital Retained earnings S 864,000 1,199,200 2,063,200 $2,983,200