Question

Please help with part c and d.

The Hastings Sugar Corporation has the following pattern of net income each year, and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of dividends.

Year	Net Income			Profitable Capital Expenditure
1	$	14	million	$	7	million
2		16	million		11	million
3		12	million		6	million
4		16	million		8	million
5		16	million		9	million

The Hastings Corporation has 3 million shares outstanding. (The following questions are separate from each other.)

a. If the marginal principle of retained earnings is applied, how much in total cash dividends will be paid over the five years? (Enter your answer in millions.)

ANSWER: $33 Million

b. If the firm simply uses a payout ratio of 30 percent of net income, how much in total cash dividends will be paid? (Enter your answer in millions and round your answer to 1 decimal place.)

ANSWER: $22.2 Million

***c. If the firm pays a 10 percent stock dividend in years 2 through 5, and also pays a cash dividend of $3.40 per share for each of the five years, how much in total dividends will be paid?

Total Cash Dividends

x

***d. Assume the payout ratio in each year is to be 20 percent of the net income and the firm will pay a 10 percent stock dividend in years 2 through 5, how much will dividends per share for each year be? (Assume the cash dividend is paid after the stock dividend.) (Round your answers to 2 decimal places.)

Year	Dividends Per Share
1	x
2	x
3	x
4	x
5	x

Answer 1

c.
Year	Shares outstanding (Beginning)	Shares issued (Stock dividend)	Shares outstanding (Ending)	Dividend per share	Total dividend
1	3.00000	0.00000	3.00000	$3.40	$10.20
2	3.00000	0.30000	3.30000	$3.40	$11.22
3	3.30000	0.33000	3.63000	$3.40	$12.34
4	3.63000	0.36300	3.99300	$3.40	$13.58
5	3.99300	0.39930	4.39230	$3.40	$14.93
					$62.27
Thus, total dividend paid would be $62.27 million
Shares issued	Shares outstanding at beginning of the year*10%
Shares outstanding (ending)	Shares outstanding at beginning of the year+Shares issued under stock dividend
Total dividend	Shares outstanding at end of the year*Dividend per share
d.
Calculation of dividend per share for each year is shown below
Year	Net income	Payout ratio	Total dividend paid	No of shares outstanding (ending)	Dividend per share
1	$14	0.2	$2.80	3.00000	$0.93
2	$16	0.2	$3.20	3.30000	$0.97
3	$12	0.2	$2.40	3.63000	$0.66
4	$16	0.2	$3.20	3.99300	$0.80
5	$16	0.2	$3.20	4.39230	$0.73
Total dividend paid = Net income*Payout ratio
Dividend per share = Total dividend paid/No of shares outstanding (ending)