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Question 5P-c

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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. Comment on the appropriateness of declaring a cash dividend at this time, using the ratios computed in part (b) as a major factor in your analysis.

The company's operating condition appears to be improving, and it appears to be able to pay a dividend.

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Step by Step Solution

Meaning of Cash Dividend

The cash dividend is paid from the net profit of the company for the financial year. It is not necessary for a firm to declare dividends; alternatively, the funds can be used for the company's other development efforts.

Explaining the appropriateness of declaring a cash dividend

The market price of the shares has not been given full recognition to the increase in return on assets, the profit margin on sales, and earnings per share. This indicates that market forces are having a negative impact on the stock market price.

It is possible that the relatively low market value of the shares is due to the fact that dividends have not been paid in the past. It may be stated that the company's operational condition is improving and that it seems to be able to pay a dividend.

However, it would be prudent to examine as far as possible the additional internal and external aspects listed in part (a) of the matter.

For 2018, a dividend in the range of 12 to 36 cents per share, or 10% to 30% of profits per share, seems reasonable. $240,000 ($0.12 X 2,000,000) to $720,000 ($0.36 X 2,000,000) will be required in cash. Payments in excess of $720,000 have a significant negative impact on working capital. At the average 2018 market price, this would result in between 1.3 and 4%.

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.

  1. Acid-test (quick) ratio for fiscal years 2017 and 2018.

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