12.2 The balance sheets of Galston Ltd as at 31 December 20X5 and 20X6 are as follows:

Galston Ltd Balance sheet as at 31 December 20X5 20X6

£ £ £ £

Fixed assets at cost 303,000 367,500 Less: Accumulated depreciation − 124,500 − 157,500 178,500 210,000 Current assets Stocks 37,500 75,000 Debtors 34,500 43,500 Bank 18,000 1,500 90,000 120,000 Less: Creditors due within one year

− 45,000 − 55,500 Working capital 45,000 64,500 223,500 274,500 Financed by:

Share capital 150,000 150,000 Retained profit at 31 Dec 20X5 73,500 73,500 Profit for 20X5 – 51,000 223,500 274,500 The figure of current liabilities as at 31 December 20X5 includes a proposed dividend of £7,500 for the year to that date. No decision has been taken yet about the dividend to be paid for 20X6, and nothing is included in the 20X6 balance sheet for such a dividend.
The directors are considering the dividend that should be paid for 20X6 in the light of the excellent results for that year.

(a) Calculations of Galston’s working capital and working capital ratio as at 31 December 20X5 and 31 December 20X6.

(b) A calculation of the maximum dividend that should be declared for 20X6 if the working capital ratio at 31 December 20X6 is to be the same as at 31 December 20X5.

(c) A brief discussion of the financial policy pursued by the directors of Galston Ltd in 20X6.