The Mori Egg Noodle Company has the following equity accounts on its balance she

Question

The Mori Egg Noodle Company has the following equity accounts on its balance sheet: Common stock ($10 par, 300,000 shares) $ 3,000,000 Contributed capital in excess of par 1,500,000 Retained earnings 6,000,000 Total common stockholders equity $10,500,000 What is the maximum amount of dividends that may be paid by the Mori Company if the capital impairment provisions of state law are limited to the following? i. The par value of common stock ii. The par value and the capital in excess of par accounts b. What other factors may limit Moris ability to pay dividends?

Explanation / Answer

a. (i) Maximum dividends = $7,500,000 (retained earnings plus capital in excess of par)

(ii) Maximum dividends = $6,000,000 of retained earnings.

b. Restrictive covenants in the firm's loan agreements, the need for liquidity, limited access to the capital markets, an unstable earnings pattern, rapid growth requiring new capital for expansion, and inflation may impair a firm's ability to pay dividends. Shareholders in high marginal tax brackets may prefer lower dividend payouts. Also, shareholders might prefer retention to a policy of paying out dividends and then raising new equity by way of the sale of new shares, in order to prevent dilution of ownership.

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