Planetary Travel Co. has $165,000,000 in stockholders’ equity. Common stock is $
ID: 2739589 • Letter: P
Question
Planetary Travel Co. has $165,000,000 in stockholders’ equity. Common stock is $60,000,000 and the balance is retained earnings. The firm has $280,000,000 in total assets and 3 percent of this value is in cash. Earnings for the year are $23,000,000 and are included in retained earnings.
What is the legal limit on current dividends? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)
What is the practical limit based on liquidity? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)
If the company pays out the amount in part b, what is the dividend payout ratio? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Planetary Travel Co. has $165,000,000 in stockholders’ equity. Common stock is $60,000,000 and the balance is retained earnings. The firm has $280,000,000 in total assets and 3 percent of this value is in cash. Earnings for the year are $23,000,000 and are included in retained earnings.
Explanation / Answer
a. Legal limits on current dividends is equal to retained earnings.
Retained earnings = Stockholder's equity - Common stock
= 165000000 - 60000000
= $105000000
b. The practical limit based on liquidity is equity to cash balance
Cash balance = Total Assets x Cash percentage
= 280000000 x 3%
= $8400000
c. Payout ratio = Dividends / Earnings x 100
= 8400000 / 23000000 x 100
= 36.52%