Reference no: EM133104780
Question - Using the money from their recent bond issue, Dover's management has decided to declare an additional $220,500 dividend. The date of declaration is December 30, 2021. The date of record will be January 15, 2022, and the date of payment will be January 30, 2022.
As an additional signal to the market, Dover's management repurchased 205,000 shares of Dover's common stock on December 15, 2021 for $4.00 a share.
Dover's tax rate is 25%.
1. Make the appropriate journal entries, if any, to account for Dover's extra dividend and stock repurchase (including any necessary changes to income tax expense).
2. What do you think Dover's creditors' (i.e. bank and bond holder) reaction will be to management's decision to issue a second dividend and to repurchase shares? In other words, based on your changes to the financial statements and the change in the ratios, do you think the creditors will be happy with the decision to pay out so much cash to investors? Why or why not.
3. At the beginning of 2020, Dover's Board of Directors authorized stock options for the executive team. The team could buy shares from the company at a set price for $6.00/share, then sell them at the current market price to make a bonus. On December 10th, Dover's stock price was only $4.40/share, making these stock options worthless. Based on this information, do you think that the management teams' decision to authorize an additional dividend and repurchase shares on December 15th was ethical? Why or why not?
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