Phillips Rock and Mud is trying to determine the maximum amount of cash dividend
ID: 2739588 • Letter: P
Question
Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year. Assume its balance sheet is as follows:
From a legal perspective, what is the maximum amount of dividends per share the firm could pay? (Do not round intermediate calculations and round your answer to 2 decimal places.)
In terms of cash availability, what is the maximum amount of dividends per share the firm could pay? (Do not round intermediate calculations and round your answer to 2 decimal places.)
Assume the firm earned an 20 percent return on stockholders’ equity last year. If the board wishes to pay out 40 percent of earnings in the form of dividends, how much will dividends per share be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year. Assume its balance sheet is as follows:
Explanation / Answer
a.
1.
From legal point of view, the cash dividends that is to be paid the firm must be to the extent of its retained earnings which is $870000.
Or on the basis of pershare, it will be $2.72 per share. ( $870000./320000).
The maximum amount of dividends Per share the firm could pay = Cash/No. of shares= $388000/320000 = $1.21
b.
It is not realistic as company never would like to use whole retained earnings to pay dividends.
Stockholder's equity is sum of common stock and retained earnings.
Stockholder's equity = $640000 + $870000 = $1510000
Return on Stockholder's equity = 20% * $1510000 = $302000
Dividend = 50% of return on equity = 40% * $302000=$120800
Dividend per share = Dividends/Number of shares = $120800/320000 = $0.38