Seydoux Industries manufactures and sells home sound equipment. A note to the company’s annual report states:

While certain of the Company’s loans are outstanding, the Company must meet specific financial tests on an ongoing basis. These agreements limit the amount of cash dividends that Seydoux may pay. At the end of 20X1, approximately $51 million was available for dividend payments in accordance with these covenants.

The company’s financial statements showed net income of $43 million, dividends of $4 million, and year-end retained earnings of $105 million.

Required:

1. Explain why and how lenders restrict a subsidiary’s ability to pay dividends to the parent corporation.

2. What was Seydoux’s dividend payout ratio?

3. What is the maximum amount of dividends the company could have paid to common stockholders in the year without violating the terms of its lending agreements?

4. Suppose that Seydoux’s loan agreements contained no restrictions on dividend payments by subsidiaries or the parent company. What is the maximum legal amount of dividends the company could have paid to common stockholders?

5. Do contractual or legal restrictions on dividend payments seem to be influencing the company’s dividend policy?