Accounting senario question?

Question:

The shares of stock have been dropping. one year it was $60 per share then he next year it goes down to $30 per share, and finally it falls to $4 per share. Then let's say this company has decided to pay a cash dividend in 2005. The dividend was equal to the amount paid the previous year. What do you think are some issues that would have been taken into consideration when they had to make that decision?

Answer:
A company can either reinvest profits back into the business or give it to shareholders as a dividend. The decision is based on where the money can do the most good. Perhaps the problems affecting the stock price can't be resolved with the money available so giving it to the shareholders that held on may be the best option. Also, a cheap stock that pays a decent dividend may attract new investors.

If a company has fallen in stock price from $60 to $4, there is usually a big reason for it. The company is in big time trouble - most likely survival mode. The consideration for paying a dividend in that situation is likely to be: Do we have the cash to maintain last year's dividend? Do we reduce the dividend, or eliminate it to use that cash to make changes?

Looks like a liquidation sale.

Accounting senario question?

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