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	$	15	million	$	8	million
2		25	million		12	million
3		9	million		7	million
4		12	million		7	million
5		16	million		8	million

The Hastings Corporation has 2 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.)

b. If the firm simply uses a payout ratio of 20 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.)

c. If the firm pays a 10 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?

d. Assume the payout ratio in each year is to be 20 percent of the 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 the cash dividend is paid after the stock dividend.) (Round your answers to 2 decimal places.)

Answer 1

a) Total Cash dividend paid = Net Income - Capital Expenditure for each year

So, total cash dividend paid over the years is calculated as shown in the table below

Year	Net Income	Profitable Capex	Dividends
1	15	8	7
2	25	12	13
3	9	7	2
4	12	7	5
5	16	8	8
		Total	35

Total Dividend paid in the 5 years will be $35 million

b) If the firm uses a 20% dividend payout ratio, Dividend in each year = 20% * Net Income

So, total cash dividend is calculated as shown in the table below

Year	Net Income	Dividends
1	15	3
2	25	5
3	9	1.8
4	12	2.4
5	16	3.2
	Total	15.4

Total Dividend paid in the 5 years will be $15.4 million

c) Assuming that the cash dividend is paid after stock dividend, total cash dividend is calculated as shown in the table below

All figures in million
Year	Net Income	No. of shares	Stock Dividend	Cash Dividend
1	15	2	0	4.80
2	25	2	0.2	5.28
3	9	2.2	0.22	5.81
4	12	2.42	0.242	6.39
5	16	2.662	0.2662	7.03
			Total	29.30

Total Dividend paid in the 5 years will be $29.3 million

d) In this case, Cash dividend = 20% of net income and

Dividend per share = total cash dividend/ (no of shares + new stock dividend),total cash dividend is calculated as shown in the table below

All figures in million
Year	Net Income	No. of shares	Stock Dividend	Cash Dividend	Dividend per share
1	15	2	0	3.00	1.50
2	25	2	0.2	5.00	2.27
3	9	2.2	0.22	1.80	0.74
4	12	2.42	0.242	2.40	0.90
5	16	2.662	0.2662	3.20	1.09