For 20 years, Bass Products Corporation, a public corporation, has followed the practice of paying a cash dividend
every quarter and has promoted itself to investors as a stable, reliable company. Recent competition from Asian companies has negatively affected its earnings and cash flows. As a result, Sandra Bass, president of the company, is proposing that the board of directors declare a stock dividend of 5% this year instead of a cash dividend. She says, "This will maintain our consecutive dividend record and will not require any cash outflow."
What is the difference between a cash dividend and a stock dividend? Why does a corporation usually distribute either kind of dividend, and how does each affect the financial statements? Is the action that Sandra Bass has proposed ethical in your eyes?