A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year’s earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earnings available for the common stockholders.
a. What is the most the firm can pay in cash dividends to each common stockholder?
(Assume that legal capital includes all paid-in capital.)
b. What effect would a cash dividend of $0.80 per share have on the firm’s balance
sheet entries?
c. If the firm cannot raise any new funds from external sources, what do you consider the key constraint with respect to the magnitude of the firm’s dividend payments? Why?
