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Question 5P-a

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Intermediate Accounting (Kieso)
Found in: Page 1452

Short Answer

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

($000 omitted)

2018

2017

2016

2015

2014

Sales revenue

$20,000

$16,000

$14,000

$6,000

$4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

$9

2,000

$6

2,000

$4

20

-

20

-

Instructions

  1. Suggest factors to be considered by the board of directors in establishing a dividend policy.

Earnings stability and instability, tax situation, organization planning and ambition, and many other factors must be considered in setting up a dividend policy.

See the step by step solution

Step by Step Solution

Dividend Policy Analysis

When a company makes a profit, it has two options for using this profit. First, they can keep the profit in the firm, or second, they can distribute it to their shareholders in the form of dividends. The number of dividends and the regularity of payment of dividends are determined by the dividend policy of the company.

Suggesting factors that should be considered by the board of directors in establishing a dividend policy

The following factors should be considered in setting up a dividend:

  1. The organization's growth plans or ambitions, as well as the need for money to fund additional operations.
  2. The company's investment options, in comparison to the return available to investors on earnings, are given in the form of a cash dividend.
  3. The impact of implementing a dividend on the market value of the company's shares, as well as the impact on financing options.
  4. The past and the future earnings stability and instability of the company
  5. The option of paying a stock dividend instead of the cash dividend.
  6. The general condition of the economy in the area where the company operates, as well as in the United States in general.
  7. The company tax position.
  8. The individual tax status of investors in which they prefer dividends or capital gains.

Most popular questions for Business-studies Textbooks

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years

BRADBURN CORPORATION

BALANCE SHEET

MARCH 31

Assets

2018

2017

Cash

$ 18,200

$ 12,500

Notes receivable

148,000

132,000

Accounts receivable (net)

131,800

125,500

Inventories (at cost)

105,000

50,000

Plant & Equipment (net of depreciation)

1,449,000

1,420,500

Total assets

$1,852,000

$1,740,500

Liabilities and Stockholders’ Equity

Accounts payable

$ 79,000

$ 91,000

Notes payable

76,000

61,500

Accrued liabilities

9,000

6,000

Common stock (130,000 shares, $10 par)

1,300,000

1,300,000

Retained earnings*

388,000

282,000

Total liabilities and stockholders’ equity

$1,852,000

$1,740,500

*Cash dividends were paid at the rate of $1 per share in the fiscal year 2017 and $2 per share in the fiscal year 2018.

BRADBURN CORPORATION

INCOME STATEMENT

FOR THE FISCAL YEARS ENDED MARCH 31

2018

2017

Sales revenue

$3,000,000

$2,700,000

Cost of goods sold*

1,530,000

1,425,000

Gross margin

1,470,000

1,275,000

Operating expenses

860,000

780,000

Income before income taxes

610,000

495,000

Income taxes (40%)

244,000

198,000

Net income

$ 366,000

$ 297,000

Depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

Instructions

A. Compute the following items for Bradburn Corporation.

4) Return on assets for fiscal years 2017 and 2018. (Assume total assets

were $1,688,500 at 3/31/16.)

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