Champoux Hair Factory, Inc., has earnings before interest and taxes of $200,000. Annual interest amounts to $80,000, and annual depreciation is $80,000. Taxes are computed at a 40 percent rate. Existing bond obligations require the payment of $40,000 per year into a sinking fund. Champoux wishes to pay a $2 per-share dividend on the existing 20,000 shares. The firm’s bond indenture prohibits the payment of dividends unless the cash flow (before dividends and sinking fund payments) is greater than the total of dividends, interest, and sinking fund obligations.
a. Can Champoux pay the proposed dividend?
b. What is the maximum dividend per share that may be paid?