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 $ 410,000 Accounts receivable 806,000 Fixed assets 1,007,000 Total assets $ 2,223,000 Liabilities and Stockholders' Equity Accounts payable $ 542,000 Long term payable 307,000 Common stock (305,000 shares at $2 par) 610,000 Retained earnings 764,000 Total liabilities and stockholders' equity $ 2,223,000 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.) 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.)

Answer 1

Philips Rock & Mud balance sheet:

Assets			Liabilities & Stockholder's equity
Cash	$410,000		Accounts Payable	$542,000
Accounts Receivables	$806,000		Long term payable	$307,000
Fixed Assets	$1,007,000		Retained Earnings	$764,000
			Common stock (305000 shares @ 2 per share)	$610,000
Total assets	2,223,000		Total liabilities & stockholder's equity	$2,223,000

a-1) As per legal requirements, dividends can only be paid out of profits, meaning that the total dividends paid in any year should not exceed the Retained earnings balance of the company.

Therefore, maximum amount of dividends payable = $764,000

Maximum Dividend per share = 764000 / 305000 ............. (Company has 305000 shares as noted in balance sheet)

Maximum Dividend per share = $2.50 per share

a-2) Dividend payments are a cash outflow to the company. Therefore, the company cannot pay dividends greater than the cash balance held. Therefore, a dividend of $2.50 per share is not realistic, since the company has only $410000 of cash.

b) Basis cash availability,

Maximum dividend per share = Total cash balance / Number of shares

= 410000 / 305000

Maximum dividend per share = $1.34 per share