Question

Planetary Travel Co. has $240,000,000 in stockholders’ equity. Eighty million dollars is listed as common stock and the balance is in retained earnings. The firm has $500,000,000 in total assets and 2 percent of this value is in cash. Earnings for the year are $40,000,000 and are included in retained earnings.

a.   What is the legal limit on current dividends?

b.   What is the practical limit based on liquidity?

c.   If the company pays out the amount in part b, what is the dividend payout ratio? (Compute this based on total dollars rather than on a per share basis because the number of shares is not given.)

d. Sometimes the corporation repurchases its own stock? Why?

e. What is the characteristic of beta?

f. What are the factors that influenced the Global capital markets?

g. The investment banker may advise clients on a continuing basic. What are these advises?

Answer 1

From the given information -

Stockholders Equity = $240,000,000

Common stock = $ 80,000,000

Total assets = $500,000,000

Cash balance = 2% of it's total assets

Cash balance = 2% * 500,000,000. = $10,000,000

Earning for the year =$40,000,000

a)The legal limit is equal to retained earnings.

Retained earnings = Stockholders Equity - common stock

= $240,000,000. -$80,000,000

Retained earnings =$160,000,000.

B)The practical limit based on liquidity is equal to Cash balance

Cash balance = 2% of it's total assets

Cash balance = 2% * 500,000,000. = $10,000,000

C) Calculation of dividend payout ratio using part b

Dividend payout ratio = dividend amount / Earnings

= 10,000,000/40,000,000

Dividend payout ratio = 25%

D)Corporations do buy back their own stock for a variety of reasons. The corporations can buy back stocks so they can reissue to employees and officers as a bonus. Another reason is signal the stock market that the stocks are under priced. This allows the company a strategy to increase value it its stock. The corporation will buy back stock to decrease the amount of Equity.