Phillips Rock and Mud is trying to determine the maximum amount of cash dividend
ID: 2806169 • 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: Assets Cash Accounts receivable Fixed assets $406,000 874,000 1,014,000 Total assets $ 2,294,000 Liabilities and Stockholders' Equity Accounts payable Long term payable Common stock (250,000 shares at $2 par) Retained eamings $ 468,000 303,000 500,000 1,023,000 Total liabilities and stockholders' equity $ 2,294,000 a-1. 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.) Dividends per share a-2. Is this realistic? Yes No b. 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.) Dividends per share c. Assume the firm earned an 20 percent return on stockholders' equity last year. If the board wishes to pay out 50 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.) Dividends per shareExplanation / Answer
a-1. From a legal perspective, a company can a mamixum dividend equal to its retained earnings on the balance sheet. So the maximum amount of dividend per share that firm could pay is:
= retained earnings / no. of shares
= 1023000 / 250000
= $4.09
a-2. No, this is not realistic as the cash balance is lower than the retained earnings, hence paying out such dividedends will lead to a negative cash balance and the company will have to take debt to pay such dividends thus incrreasing its cost of operations.
b. In terms of cash, the maximum dividends per share that can be paid by the company is:
= cash balance / no. of shares
= 406000 / 250000
= $1.62
c. Return on stock holder's equity = 20%
Return on stock holder's equity = net income / stockholders equity
20% = net income / 500000
Hence, net income = $1,00,000
If 50% of earnings are to be paid as dividends, the dividend per share is:
= 50%*100000 / 250000
= $0.20