Dividend constraintsThe Howe Company\'s stockholders\' equity account is as foll
ID: 2802629 • Letter: D
Question
Dividend constraintsThe Howe Company's stockholders' equity account is as follows:
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. The earnings available for common stockholders from this period's operations are $100,000, which have been included as part of the
$1.7 million retained earnings.
a. What is the maximum dividend per share that the firm can pay? (Assume that legal capital includes all paid-in capital.)
b.If the firm has $120,000 in cash, what is the largest per-share dividend it can pay without borrowing?
c. Indicate the accounts and changes, if any, that will result if the firm pays the dividends indicated in parts a and b.
d. Indicate the effects of an
$80,000 cash dividend on stockholders' equity.
Common stock (600,00 shares at $6 par) $3,600,000
paid-in-capital in excess of par $2,000,000
Retained earnings $1,700,000
Total stockholders' equity $7,300,000
Common stock (600,00 shares at $6 par) $3,600,000
paid-in-capital in excess of par $2,000,000
Retained earnings $1,700,000
Total stockholders' equity $7,300,000
Explanation / Answer
a. What is the maximum dividend per share that the firm can pay? (Assume that legal capital includes all paid-in capital.)
Solution:
Maximum dividend per share= Total distributable profits/number of outstanding equity shares = $1700,000/600,00= $28.33
b. If the firm has $120,000 in cash, what is the largest per-share dividend it can pay without borrowing?
Solution:
Largest per-share dividend without borrowing= Cash available with firm/ number of outstanding equity shares= 120000/60000= $ 2 (Maximum DPS without borrowing)
c. Indicate the accounts and changes, if any, that will result if the firm pays the dividends indicated in parts a and b.
Solution: if the firm pays the dividends indicated in (a) and (b) results effecting to retain earnings and cash each declined by $1700,000 and $120000. (Note: Assume that preference share dividends have paid in full).
d. Indicate the effects of an $80,000 cash dividend on stockholders' equity
Solution. Hence the effect of retain earnings ( stockholders' equity) declined by $80000
Note: (c and d ): The company creates a liability by declaring the dividends a “ dividends payable” and at the same time it reduces the retained earnings and stockholders equity. Assets and liabilities of firm have both declined by an equally in amount to keep the balance in accounting equation as assets= Liability + equity hence stockholders' equity is reduced by the total value of all dividends paid as mentioned above.