Question

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	$	8	million
2		18	million		11	million
3		9	million		6	million
4		20	million		8	million
5		23	million		9	million

The Hastings Corporation has 2 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.)

Total cash dividends ______ millions

b. If the firm simply uses a payout ratio of 20 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.)

Total Cash dividends ______ millions

c. If the firm pays a 20 percent stock dividend in years 2 through 5, and also pays a cash dividend of $2.40 per share for each of the five years, how much in total dividends will be paid?

Total cash dividends ______

d. Assume the payout ratio in each year is to be 30 percent of the net income and the firm will pay a 20 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 _____________

2_____________

3_____________

4_____________

5_____________

Answer 1

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05:59 1 Leg W ? v . ** ENG 26-02-2020 19 AR635 X AK fie AL AS AM AN AO AP AQ AR AS AT AU AV AW - 614 615 616 617 MARGINAL PRINCIPLE OF RETAINED EARNINGS : PROFITABLE CAPITAL YEAR NET INCOME(A) EXPENDITURE (B) IT MEANS WHAT IS LEFT ARE ALLOCATING FOR CAPITAL EXPENDITURE DIVIDEND PAID (A-B) 6 14 618 619 18 9 uw co 622 TOTAL CASH DIVIDEND PAID IN 5 YEARS = 625 (b) DIVIDEND PAYOUT = 20% OF NET INCOME 627 YEAR NET INCOME(A) DIVIDEND PAID 20% OF NET INCOME 2.8 3.6 1.8 18 الية 9 631 20 ل 632 23 4.6 633 TOTAL CASH DIVIDEND PAID IN 5 YEARS = 16.8 634 635 (c) 20% STOCK DIVIDEND IN YEARS 2 TO 5 ALSO CASH DIVIDEND $2.40 PER SHARE FOR 5 YEARS 636 637 ... ARM, MSI,confidenceINDEX LOAN CURRENCY CROSS OVER GM HPRAM TAX HEDGING MONEY MARKET GROWTH SUST PREF AND DIV POLICY She ... :

1 Leg W ? v . 1 06-00 ENG 26-02-202019 AS653 - X AK fix AL AS AM AN AO AP AQ AR AS AT AU AV AW - 634 635 (c) 636 20% STOCK DIVIDEND IN YEARS 2 TO 5 ALSO CASH DIVIDEND $2.40 PER SHARE FOR 5 YEARS 637 638 639 STOCK DIVIDEND 2 MILLION SHARES 640 YEAR U AWNA CASH DIVIDEND 2.40 PER SHARE (DIVIDEND X NO OF SHARES) 4.8 (2.40 X 2) 5.76 (2.40 X 2.4) 6.912 (2.40 X 2.88) 8.2944 (2.40 X 3.456) 9.95328 (2.40 X 4.1472) 2 X 20% =0.4 2.4 X 20% = 0.48 2.88 X 20% = 0.576 3.456 X 20% =0.6912 TOTAL SHARES AFTER STOCK DIVIDEND 2 MILLION 2.4 MILLION 2.88 MILLION 3.456 MILLION 4.1472 MILLION 646 647 TOTAL DIVIDEND = 35.71968 CASH DIVIDEND (IN MILLIONS) 2.1472 MILLION (0.4 +0.48 + 0.576 +0.6912] STOCK DIVIDEND 648 649 650 ANS 35719680 651 652 653 654 655 656 657 ... ARM, MSI,confidenceINDEX LOAN CURRENCY CROSS OVER GM HPRAM TAX HEDGING MONEY MARKET GROWTH SUST PREF AND DIV POLICY She ...

| 0 = = = = = 3 g W v ( 1 06-00 ENG 26-02-202019 AL671 . x AK fe AL AJ AM AN AO AP AQ AR AS AT AU AV AW - 652 653 (d) 20% STOCK DIVIDEND IN YEARS 2 TO 5 DIVIDEND PAYOUT = 30% OF NET INCOME 654 655 656 STOCK DIVIDEND 2 MILLION SHARES YEAR 657 658 Hem O DIVIDEND PAID NET INCOME(A) 30% OF NET INCOME 14 4.2 5.4 9 2.7 6 6.9 2 X 20% =0.4 2.4 X 20% = 0.48 2.88 X 20% = 0.576 3.456 X 20% =0.6912 TOTAL SHARES AFTER STOCK DIVIDEND 2 MILLION 2.4 MILLION 2.88 MILLION 3.456 MILLION 4.1472 MILLION 663 664 DIVIDEND PER SHARE YEAR DIVIDEND PAID NO OF SHARES 4.2 5.4 2.7 DIVIDEND PER SHARE 2 2.10 2.4 2.25 2.88 0.94 3.456 1.74 4.1472 1.66 669 un AwN 6.9 674 675 ... ARM, MSI,confidenceINDEX LOAN CURRENCY CROSS OVER GM HPRAM TAX HEDGING MONEY MARKET GROWTH SUST PREF AND DIV POLICY She ... :