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:

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	$	369,000
Accounts receivable		843,000
Fixed assets		993,000
Total assets	$	2,205,000
Liabilities and Stockholders' Equity
Accounts payable	$	476,000
Long term payable		314,000
Common stock (285,000 shares at $1 par)		285,000
Retained earnings		1,130,000
Total liabilities and stockholders' equity	$	2,205,000

 

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.)

 

Dividends per share

$

 

a-2.	Is this realistic?
	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.)

 

Dividends per share

$

 

c.	Assume the firm earned an 24 percent return on stockholders’ equity last year. If the board wishes to pay out 50 percent of earnings in the form of dividends, how much will dividends per share be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

Dividends per share

$

 
Explanation:

a-1.

From a legal viewpoint, the firm can pay cash dividends equal to retained earnings.

Maximum legal dividend per share	= Retained earnings / Number of shares
	= $1,130,000 / 285,000
	= $3.96 per share

a-2.

Paying the maximum legal dividend would not be realistic considering the firm's cash availability.

b.

Maximum cash available dividend per share	= Cash / Number of shares
	= $369,000 / 285,000
	= $1.29

c.

Total earnings	= Return on equity × Total equity
	= .24 × ($285,000 + 1,130,000)
	= $339,600

Total dividends	= Dividend payout ratio × Total earnings
	= .50 × $339,600
	= $169,800

Dividends per share	= Total dividends / Number of shares
	= $169,800 / 285,000
	= $.60