In your discussions with the CFO you have talked about the impact of a dividend on your company’s market price and financial statements. He has asked that you and your team evaluate the impact of issuing a dividend.

Use the income statement and balance sheet provided to make recommendation for the amount of dividend (if any). How are retained earnings impacted and what does this mean for the organization?

Compute the Internal Growth Rate and Sustainable Growth Rate using current (2015) financial information and then a second scenario; if we issue a dividend payment of $3 million.

Explain your thought process and rationale for a recommended dividend strategy.

ACME Iron		Balance Sheet
Assets
Current assets:	2014	2015	change
Cash	500,000	600,000	100,000
Investments	1,000,000	1,025,000	25,000
Inventories	110,000,000	117,000,000	7,000,000
Accounts receivable	11,750,000	12,500,000	750,000
Pre-paid expenses	2,500,000	2,600,000	100,000
Other	0	0	-
Total current assets	125,750,000	133,725,000	7,975,000
Fixed assets:	2014	2015	change
Property and equipment	165,000,000	175,000,000	10,000,000
Leasehold improvements	0	0	-
Equity and other investments	55,000,000	65,000,000	10,000,000
Less accumulated depreciation	15,000,000	15,500,000	500,000
Total fixed assets	235,000,000	255,500,000	20,500,000
Other assets:	2014	2015	change
Goodwill	75,000,000	70,000,000	(5,000,000)
Total other assets	75,000,000	70,000,000	(5,000,000)
Total assets	435,750,000	459,225,000	23,475,000
Liabilities and owner's equity
Current liabilities:	2014	2015	change
Accounts payable	40,500,000	42,400,000	1,900,000
Accrued wages	85,000,000	90,500,000	5,500,000
Accrued compensation	10,000,000	10,855,000	855,000
Income taxes payable	4,024,000	4,697,000	673,000
current portion of LT debt	5,500,000	10,350,000	4,850,000
Other	0	0	-
Total current liabilities	145,024,000	158,802,000	13,778,000
Long-term liabilities:	2014	2015	change
Long term debt	125,000,000	130,000,000	5,000,000
Total long-term liabilities	125,000,000	130,000,000	5,000,000
Owner's equity:	2014	2015	change
Common stock	122,000,000	122,000,000	-
Preferred stock	16,725,000	16,725,000	-
Accumulated retained earnings	27,001,000	31,698,000	4,697,000
Total owner's equity	165,726,000	170,423,000	4,697,000
Total liabilities and owner's equity	435,750,000	459,225,000	23,475,000

Concept Check: Dividends are distributions of profits to your investors who placed their capital at risk for you. Theoretically every company should eventually provide a dividend distribution to their investors.

Dividends are voted on every quarter by the Board of Directors for a company; the amount of the dividend or if any is paid can be decided at that time.

Answer rating: 100% (QA)

Answer Earning For 2015 4697000 Earning for the Year 469700000 Less Divide... View the full answer