Problem:
You are the holder of common stock in ABS, Inc. Historically, the firm has paid generous cash dividends. The firm recently announced that it would replace its cash dividend with a 20 percent annual stock dividend.
Answer the following:
a) Is this good news, bad news, or is it impossible to tell from the information provided? Explain the reason for your answer.
b) Why do many firms choose to issue stock dividends?
c) What is the value of a stock dividend?
Please provide a thorough, qualitative answer.