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Analysis of Amount of Dividends, Cash or Stock, Payout Ratio

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1. 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.

Profitable Capital

Year Net Income Expenditure

1......... $10 million $ 7 million

2......... 15 million 11 million

3......... 9 million 6 million

4......... 12 million 7 million

5......... 14 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?

b. If the firm simply uses a payout ratio of 40 percent of new income, how much in total cash dividends will be paid?

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?

d. Assume the payout ratio in each year is to be 30 percent of net income and the firm will pay a 20 percent stock dividend in years 2 through 5, how much will dividends per share for each year be?

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Solution Summary

The solution determines the analysis of amount of dividends, cash or stock and payout ratio.

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ANSWERS
Please see attached file for answers.

Requirement A
Year Net income Profitable capital expenditure Cash dividends
A B A - B
1 $ 10.00 $ 7.00 $ 3.00
2 $ 15.00 $ 11.00 $ 4.00
3 $ 9.00 $ 6.00 $ 3.00
4 $ 12.00 $ 7.00 $ 5.00
5 $ 14.00 $ 8.00 $ 6.00
Total $ 60.00 $ 39.00 $ 21.00
NOTE: $ figures are in millions

Requirement B
Year Net income Payout ratio Cash ...

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