Universal Ltd has recently disposed of its telecom facilities in England and will report strong profits in
Question:
Universal Ltd has recently disposed of its telecom facilities in England and will
report strong profits in 2012. The CFO is considering to pay out dividends to
the shareholders. Below is the balance sheet:
Assets
Cash $700,000
Accounts receivable $2,000,000
Fixed Assets $5,000,000
Total Assets $7,700,000
Liabilities and Stockholders' Equity
Accounts payable $2,490,000
Short-term bank loan $10,000
Common stock (1,000,000 shares @ $3 par) $3,000,000
Retained earnings $2,200,000
Total liabilities and stockholders' equity $7,700,000
Additional info: Universal has a short-term bank facility limit for $5,000,000 that was only slightly utilized. The maturity date of the loan is on May 30, 2013. The bank manager will then examine the company to decide whether to renew the bank facility.
a. As the company will report strong earnings, the shareholders expect very good dividend
payment this year. what is the maximum amount of dividends per share the firm could pay?
Do you recommend to do so? (8%)
b. In terms of current cash availability, what is the maximum amount of dividends per share
the firm could pay? (8%)
c. Assume the firm earned an 18 percent return on stockholders' equity last year. If the
board wishes to pay out 50 percent of earnings in the form of dividends, how much will
dividends per share be? (9%)
Expert Answer:
a To determine the maximum amount of dividends per share the firm could pay we need to consider the retained earnings and the number of outstanding sh... View the full answer
