Question

Gladstone Industries pays a quarterly dividend of $0.50 per share. Over the past 30 years, the firm's cash balance has steadily increased to the point where the firm now feels that it should make a one-time distribution of a portion of these excess funds. If the firm pays an additional $3 per share to lower its cash reserves, the dividend will be classified as which type of dividend?

Answer 1

Gladstone Industries' additional $3 per share distribution is classified as a special dividend, which is a one-time payment to shareholders separate from regular dividends, providing a return on their investment.

Step-by-step explanation:

If Gladstone Industries pays an additional dividend of $3 per share to lower its cash reserves, the dividend would be classified as a special dividend. A special dividend is a non-recurring distribution of company assets, usually in the form of cash, to shareholders. This is different from regular dividends that are issued, typically on a quarterly basis, as part of the company's recurring dividend policy. In the case of Gladstone Industries, since the firm pays a regular quarterly dividend of $0.50 per share, the additional $3 per share represents a one-time event rather than an ongoing commitment. As described in the reference information, a dividend is a direct payment to shareholders, reflecting a portion of the company's profits. By contrast, capital gains are increases in the value of the stock from the point it is purchased to when it is sold, providing a different form of return to investors.