A scrip dividend (stock dividend) means shareholders receive additional shares instead of cash. CIMA F3 explains that this is commonly used when a company wants to maintain a “visible” dividend policy but conserve cash because of short-term liquidity or profit pressures. Shareholders get something of value – more shares – while the company avoids a large immediate cash outflow, keeping funds available to support operations and future growth.

In the scenario, the company has strong long-term prospects but current profit and cash-flow problems. That is exactly the situation where F3 suggests that a scrip dividend is attractive: it encourages shareholders to leave cash in the business while still signalling confidence.

A is incorrect: a scrip dividend does not raise new external finance; it just capitalises reserves. B is wrong because issuing more shares normally reduces earnings per share, all else equal. D is misleading: dividend per share usually falls or at best is unchanged in cash terms; what increases is the number of shares, not the cash amount per share. Therefore, C is the most appropriate reason.