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P14–4Dividend constraints The Howe Company’s stockholders’ equity account follows: Common stock (400,000 shares at $4 par)...

P14–4Dividend constraints The Howe Company’s stockholders’ equity account follows:

Common stock (400,000 shares at $4 par) $1,600,000
Paid-in capital in excess of par $1,000,000
Retained earnings $1,900,000
    Total stockholders’ equity $4,500,000

The earnings available for common stockholders from this period’s operations are $100,000, which have been included as part of the $1.9 million retained earnings.

  1. What is the maximum dividend per share that the firm can pay? (Assume that legal capital includes all paid-in capital.)

  2. If the firm has $160,000 in cash, what is the largest per-share dividend it can pay without borrowing?

  3. Indicate the accounts and changes, if any, that will result if the firm pays the dividends indicated in parts a and b.

  4. Indicate the effects of an $80,000 cash dividend on stockholders’ equity.

Solutions

Expert Solution

Answer a.

Company can pay a maximum dividend of total accumulated profit over the past years i.e., retained earnings.

Maximum dividend = $1,900,000
Number of shares outstanding = 400,000

Maximum dividend per share = Maximum dividend / Number of shares outstanding
Maximum dividend per share = $1,900,000 / 400,000
Maximum dividend per share = $4.75

The maximum dividend per share that the firm can is $4.75

Answer b.

Company can pay a largest dividend equal to the cash available with it.

Largest dividend = $160,000
Number of shares outstanding = 400,000

Largest dividend per share = Largest dividend / Number of shares outstanding
Largest dividend per share = $160,000 / 400,000
Largest dividend per share = $0.40

If the firm has $160,000 in cash, the largest per-share dividend it can pay without borrowing is $0.40.

Answer c.

If the firm pays the dividends indicated in part a, cash will decrease by $1,900,000.
If the firm pays the dividends indicated in part a, retained earnings will decrease by $1,900,000.

If the firm pays the dividends indicated in part b, cash will decrease by $160,000.
If the firm pays the dividends indicated in part b, retained earnings will decrease by $160,000.

Answer d.

Stockholders’ equity will decrease by $80,000 to $1,820,000 ($1,900,000 - $80,000).

jeff jeffy answered 1 year ago
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