Response to the following problem:
Cooper Fashions is ideally positioned in the clothing business. Located in Toledo, Ohio, Cooper is the only company with a distribution network for its imported goods. The company does a brisk business with specialty stores such as Neiman Marcus, Saks Fifth Avenue, and Nordstrom. Cooper's recent success has made the company a prime target for a takeover. Against the wishes of Cooper's board of directors, an investment group from Canada is attempting to buy 51% of Cooper's outstanding stock. Board members are convinced that the Canadian investors would sell off the most desirable pieces of the business and leave little of value.
At the most recent board meeting, several suggestions were advanced to fight off the hostile takeover bid. One suggestion is to increase the stock outstanding by distributing a 100% stock dividend. The intent is to spread the company's ownership in order to make it harder for the Canadian group to buy a controlling interest.
Required:
As a significant stockholder of Cooper Fashions, write a short memo to explain to the board whether distributing the stock dividend would make it more difficult for the investor group to take over Cooper. Include in your memo a discussion of the effect that the stock dividend would have on assets, liabilities, and total stockholders' equity-that is, the dividend's effect on the size of the corporation.