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Question Best Ski Manufacturer usually pays a cash dividend sufficient to give investors a dividend yield (annual dividend

divided by stock price) of around 6%. Last quarter, Best Ski Manufacturer paid a quarterly cash dividend of $1 per share. Its stock price is currently at $65 per share. In the current quarter, Best Ski has suddenly experienced a big slowdown in ski equipment orders. The vice president of finance unequivocally stated that Best Ski just didnt have the cash to pay another cash dividend of $1 per share. She suggested that Best Ski make a public announcement explaining the situation to shareholders. This suggestion infuriated the chief executive officer, who subsequently insisted that nothing be done to make the shareholders nervous or pessimistic about Best Skis future prospects. The controller (your boss) came to the rescue with an accounting solution to the problem. He proposed that Best Ski declare a 10% stock dividend in place of the regular quarterly cash dividend. He said that a stock dividend is merely a cosmetic increase in the number of shares, with no associated cash flow, either into or out of the company. However, he claimed that investors would never know the difference between a cash dividend and a stock dividend. The controllers suggestion was met with enthusiasm by the board of directors. The shareholder relations department is drafting a press release to announce the 10% stock dividend. Because of your accounting expertise, you have been asked to help with the wording of the memo. What wording would you suggest? Answer Declaring a stock dividend in lieu of a cash dividend is not unethicalthis happens all the time. And this wouldnt be the first time that a company thought it was fooling the investors.

Your key responsibility is to make sure investors know that this stock dividend is in place of the regular cash dividendthat is, there will be no cash dividend this quarter.

As far as the underlying reason for the cessation of cash dividends, it isnt your place to disclose private company information. However, dont worry. Investors arent as stupid as Best Skis board of directors thinks. When the stock dividend is announced, investors will immediately begin to bombard Best Skis corporate headquarters with questions. If Best Ski is a large enough company, some enterprising finan-cial press reporter will investigate and find out about the decline in orders.

The news will get out. You just make sure the press release lets investors know the real story behind this particular 10% stock divi-dendthat cash dividends have been dropped.