The Hastings Sugar Corporation has the following pattern of net income each year
ID: 2740049 • Letter: T
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.
The Hastings Corporation has 2 million shares outstanding (The following questions are separate from each other).
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.)
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.)
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?
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.)
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.
Explanation / Answer
a. Marginal Priniciple of Retained Earnings is a principle where dividend is paid to the shareholders after making an analysis between the firm and the shareholders. The firm will earn more if it is invested in the concern or the shareholder will earn more if it is paid out as dividend. If the firm's will earn more than it is retained in the concern in the form of retained earnings or if the shareholders have good investment avenues and will earn more in outside investments through the dividend amount than dividend is distributed to them.
In the given case as it is mentioned that 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. So the marginal principle of retained earni ngs would suggest retaintion of dividend amount than its distribution.
So the Cash Dividend amount would be Nil.
b.If the firm simply uses a payout ratio of 20 percent of net income, how much in total cash dividends will be paid?
year Net income payout ratio(20%)
1 15 3
2 25 5
3 09 1.8
4 12 2.4
5 16 3.2
Total 15.4
Total cash dividend to be paid $15.4 million
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?
No. of shares outstanding= 2 million no. of shares
Stock dividend in year 2 to 5years=10% of 2 million shares=200000
Cash Dividend=($2.4*2000000)+(200000*$2.4)=$48 millions+$.48 million=$48.48 Million
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).
year Net income payout ratio(20%)
1 15 3
2 25 5
3 09 1.8
4 12 2.4
5 16 3.2
Total 15.4
Stock Dividend from year 2 through 5 year=10% of 2 Million= 2 lac no. of shares
Dividend per share= $15.4 million/(2million+.2 million)
= $7 per share
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