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Unformatted text preview: ay issue a stock dividend for several reasons. These reasons could include wanting to give
the appearance of paying a dividend when there is limited cash on hand, wanting to decrease the market
price of the shares outstanding, or wanting to expand the number of shares outstanding without selling
new stock. ID12–2
There are two general situations that would lead a company to cut its dividend. The first scenario is when
a company is no longer able to generate enough cash to pay the dividend that it has been paying in the
past. This usually reflects a downturn in the company’s business and the stock price does not act well
after this announcement. The second scenario is when a company has been paying a dividend and is still
generating enough cash to pay the dividend but decides not to. This is usually because the company
feels that it has very good investment opportunities and wants to use the money to pursue them. This is
usually a positive sign and the stock price may rise. ID12–3
Since the stock price of a company...
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