Royal Company is currently considering declaring a dividend to its common shareholders, according to one of the following plans:
1. Declare a cash dividend of $15 per share.
2. Declare a 10 percent stock dividend. Royal Company would distribute one share of common stock for every 10 shares of common stock currently held. The company's common stock is currently selling for $50 per share.
Royal Company is authorized to issue 100,000 shares of $10 par value common stock. To date, the company has issued 55,000 shares and is currently holding 8,000 shares in treasury stock.
REQUIRED:
a. How many shares of common stock are eligible to receive a dividend?
b. Prepare the entries necessary on the date of declaration, date of record, and date of payment for the cash dividend.
c. Prepare the entry to record the stock dividend, assuming that the dividend is declared and issued on the same date.
d. Describe how each dividend would affect Royal's debt/equity ratio.
e. Which of the two dividends would you, as a shareholder, prefer to receive? Why?