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.

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		$13 million			$  7 million
2		24 million			11 million
3		17 million			6 million
4		18 million			8 million
5		22 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.)

   

Total cash dividends

$  million

  

b.	If the firm simply uses a payout ratio of 50 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 10 percent stock dividend in years 2 through 5, and also pays a cash dividend of $3.40 per share for each of the five years, how much in total dividends will be paid?

   

Total cash dividends

$

  

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

    

Year	Dividends per Share
1	$
2	$
3	$
4	$
5	$

 
Explanation:

a.

Dividends represent what is left over after profitable capital expenditures are undertaken.

  

Year	Net Income			–	Profitable Capital Expenditures			Dividends
1	$	13 million			$	7 million		$	6 million
2		24 million				11 million			13 million
3		17 million				6 million			11 million
4		18 million				8 million			10 million
5		22 million				8 million			14 million
				Total cash dividends				$	54 million

  
b.

Year	Net Income			×	Payout Ratio			Dividends
1		$13 million				.50			$   6.5 million
2		24 million				.50			12.0 million
3		17 million				.50			8.5 million
4		18 million				.50			9.0 million
5		22 million				.50			11.0 million
Total cash dividends									$ 47.0 million

  
c.

Year	Shares Outstanding			×	Dividends per Share			Dividends
1	2,000,000				$	3.40		$	6,800,000
2	2,200,000					3.40			7,480,000
3	2,420,000					3.40			8,228,000
4	2,662,000					3.40			9,050,800
5	2,928,200					3.40			9,955,880
			Total cash dividends					$	41,514,680

  
d.

Year	Net Income	Payout Ratio	Dividends	Shares	Dividends per Share
1	$ 13 million	.20	$ 2.6 million	2,000,000	$ 1.30
2	24 million	.20	4.8 million	2,200,000	2.18
3	17 million	.20	3.4 million	2,420,000	1.40
4	18 million	.20	3.6 million	2,662,000	1.35
5	22 million	.20	4.4 million	2,928,200	1.50