Question

The Hastings Sugar Corporation has the following pattern of net income each year, and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of dividends.

   

Year	Net Income			Profitable Capital Expenditure
1		$11 million			$ 8 million
2		23 million			11 million
3		9 million			7 million
4		14 million			8 million
5		22 million			9 million

The Hastings Corporation has 3 million shares outstanding (The following questions are separate from each other).    

a. If the marginal principle of retained earnings is applied, how much in total cash dividends will be paid over the five years? (Enter your answer in millions.)
43 million  

b. If the firm simply uses a payout ratio of 30 percent of net income, how much in total cash dividends will be paid? (Enter your answer in millions and round your answer to 1 decimal place.)
23.7 million  

c. If the firm pays a 20 percent stock dividend in years 2 through 5, and also pays a cash dividend of $2.40 per share for each of the five years, how much in total dividends will be paid?
  

	Total cash dividends

d. Assume the payout ratio in each year is to be 20 percent of net income and the firm will pay a 10 percent stock dividend in years 2 through 5. How much will dividends per share for each year be? (Assume cash dividend is paid after the stock dividend). (Round your answers to 2 decimal places.)

	Year Dividends per Share 1 2 3 4 5

Answer 1

a. Dividends are paid with leftover after profitable capital expenditures have been undertaken by the company
Year	Net Income (In millions)	Profitable capital expenditures (In millions)	Dividends (In millions) (Net income - profitable capital expenditure)
1	$11	$8	$3
2	$23	$11	$12
3	$9	$7	$2
4	$14	$8	$6
5	$22	$9	$13
		Total dividends	$36
Company would pay total $36 million in cash dividend
b.
Year	Net Income (In millions)	Payout ratio	Dividends (In millions) (Net income*Payout ratio)
1	$11	30.00%	$3.3
2	$23	30.00%	$6.9
3	$9	30.00%	$2.7
4	$14	30.00%	$4.2
5	$22	30.00%	$6.6
		Total dividends	$23.7
Company would pay total $23.7 million in cash dividend if payout ratio is 30% of the net income
c.
If company pays stock dividend of 20 percent each year than the number of shares outstanding would increase by 20% in years 2 to 5 and cash dividend of $2.40 would be paid on these shares outstanding
Year	Shares outstanding		Dividends per share	Dividends (Shares outstanding*Dividend per share)
1	3000000		2.4	$7,200,000
2	3600000	3000000*1.20	2.4	$8,640,000
3	4320000	3600000*1.20	2.4	$10,368,000
4	5184000	4320000*1.20	2.4	$12,441,600
5	6220800	5184000*1.20	2.4	$14,929,920
			Total cash dividend	$53,579,520
Company would pay total cash dividend of $53,579,520
d.
Year	Net income (In millions)	Payout ratio	Dividends	Shares (millions)	Dividends per share (Dividends/Shares)
1	$11	0.2	$2.20	3	$0.73
2	$23	0.2	$4.60	3.3	$1.39
3	$9	0.2	$1.80	3.63	$0.50
4	$14	0.2	$2.80	3.993	$0.70
5	$22	0.2	$4.40	4.3923	$1.00