C indicate the accounts and changes if any that will

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Unformatted text preview: ailable for common stockholders from this period’s operations are $100,000, which have been included as part of the $1.9 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 $160,000 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. LG3 13–5 Dividend constraints A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year’s earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earnings available for the common stockholders. a. What is the most the firm can pay in cash dividends to each common stockholder? (Assume that legal capital includes all paid-in capital.) b. What effect would a cash dividend of $0.80 per share have on the firm’s balance sheet entries? c. If the firm cannot raise any new funds from external sources, what do you consider the key constraint with respect to the magnitude of the firm’s dividend payments? Why? LG4 13–6 Low-regular-and-extra dividend policy Bennett Farm Equipment Sales, Inc., is in a highly cyclic business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to that ratio would result in a fluctuating dividend and create uncertainty for the firm’s stockholders. Therefore, the firm has declared a regular dividend of $0.50 per share per year with extra cash dividends 582 PART 4 Long-Term Financial Decisions to be paid when earnings justify them. Earnings per share for the last several years are as follows: Year EPS 2003 $3.00 2002 2.40 2001 2.20 2000 2.80 1999 2.15 1998 1.97 a. Calculate the payout ratio for each year on the basis of the regular $0.50 dividend and the cited EPS. b. Calculate the difference between the regular $0.50 dividend and a 25% payout for each year. c. Bennett has established a policy of paying an extra dividend only when the difference between the regular dividend and a 25% payout amounts to $1.00 or more. Show the regular and extra dividends in those years when an extra dividend would be paid. What would be done with the “extra” in years when an extra dividend is not paid? d. The firm expects that future earnings per share will continue to cycle but will remain above $2.20 per share in most years. What factors should be considered in making a revision to the amount paid as a regular dividend? If the firm revises the regular dividend, what new amount should it pay? LG4 13–7 Alternative dividend policies Over the last 10 years, a firm has had the earnings per share shown in the following table. Year Earnings per share 2003 $4.00 2002 3.80 2001 3.20 2000 2.80 1999 3.20 1998 2.40 1997 1.20 1996 1.80 1995 0.50 1994 0.25 a. If the firm’s dividend policy were based on a constant payou...
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