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                $19 million              $ 7 million

2                 19 million               12 million

3                  9 million                 6 million

4                 14 million                 7 million

5                   17 million              8 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.)

Total Cash Dividends ___________ million

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.)

Total Cash Dividends ___________ 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 ___________ million

d. Assume the payout ratio in each year is to be 40 percent of net income and the firm will pay a 30 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              Divideneds Per Share

1                   _______________

2                  ______________

3                _____________

4               ______________

5             _______________

Answer 1

(a).Total cash dividends will be paid over the five years                                              

Year       Net Income        Profitable Capital Expenditure Dividends

1              $ 19 Million                         $7 Million                             $ 12 Million

2              $ 19 Million                         $ 12Million                          $ 7 Million

3              $ 9 Million                            $ 6Million                             $ 3 Million

4              $ 14 Million                         $ 7Million                             $ 7 Million

5              $ 17 Million                         $ Million8                             $ 9 Million

                                Total Cash Dividends                                     $ 38 Million

(b). Total cash dividends if the firm uses a payout ratio of 20%                                 

                                               

Year       Net Income        Payout Ratio      Dividends

1              $ 19 Million               0.20                 $ 3.8 Million

2              $ 19 Million              0.20                   $ 3.8 Million

3              $ 9 Million                0.20                   $ 1.80 Million

4              $ 14 Million              0.20                   $ 2.80 Million

5              $ 17 Million              0.20                   $ 3.40 Million

                                Total Cash Dividends     $ 15.60 Million

©. Total cash dividends in case of company pays dividend of $ 2.40/share                                          

                                               

Year       Share Outstanding          Dividend per share         Dividends

1              3,000,000.00                                      2.40                        $7,200,000

2              3,600,000.00                                      2.40                        $8,640,000

3              4,320,000.00                                      2.40                        $10,368,000

4              5,184,000.00                                      2.40                        $12,441,600

5              6,220,800.00                                      2.40                        $14,929,920

                                                                Total Cash Dividends     $53,579,520

(d). Calculation of Dividend per share                                                                  

                                                                               

Year       Net Income (in million)                Payout Dividends           Shares(In Million)           Dividend/share

1              $19.00                                 0.40       $7.60                                    $3.00                                    $2.53

2              $19.00                                 0.40       $7.60                                    $3.90                                    $1.95

3              $9.00                                    0.40       $3.60                                    $5.07                                    $0.71

4              $14.00                                 0.40        $5.60                                    $6.59                                    $0.85

5              $17.00                                 0.40       $6.80                                    $8.57                                     $0.79