Some accountants, financial analysts, and others feel that dividend payments to owners are important to potential investors in a firm's common shares. They disagree as to the best accounting measures with which to predict dividend declarations. Some argue that net income is best, others argue that working capital from operations is best, and still others argue that cash from operations is best. It is not possible for us to explore in depth the theoretical and empirical ramifications of this question. Exhibit 5.17 provides, however, data from six recent years for three well-known companies-American Telephone \& Telegraph Co., General Electric Company, and Sears, Roebuck \& Co. What inferences, if any, can you draw from these data about the relations between dividends and the various accounting measures shown? (Hint: You might find it useful to compute the percentage changes in the data series from year to year.)

Transcribed Image Text:

EXHIBIT 5.17 Information from Financial Statements of Three Companies (Problem 29) American Telephone & Telegraph Co. Net Income Working Capital from Operations Cash from Operations. Dividends Dollar Amounts in Millions Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $2,199 6,933 8,088 1,346 $2,189 $2,240 7.064 7,659 9,448 10,871 7,639 6,899 9,757 10,675 1,428 1,428 1,483 1,591 $2,532 $2,947 $ 3,170 12,385 13,397 1,808 Sears, Roebuck & Co. Net Income Cash from Operations... Dividends $ 441 $ 464 $ 551 $ 614 $ 680 $ 511 Working Capital from Operations 1,057 1,008 1,087 1,159 1,348 1,233 1,053 814 1,058 923 1,264 1,253 208 208 232 252 275 291 General Electric Company Net Income Working Capital from Operations Cash from Operations. Dividends $ 278 $ 328 $ 472 $ 530 $ 585 $ 608 777 883 1,046 1,129 1,320 1,431 1,018 996 1.012 826 1,464 1,131 235 235 250 255 273 291