1. Marian Hobby Store pays a dividend of $0.35 per share per quarter. The next dividend will be paid to shareholders of record on Friday, December 20, 2013. The company has 3 million shares outstanding, and its stock price was $15 the day prior to the ex-dividend date. There is $75 million in retained earnings before the dividend and $8 million in cash.

a. What is the ex-dividend date?

b. What is the stock price on the ex-dividend date?

c. How are the cash, retained earnings and total assets affected?

2. ABC has EBIT of $2 million, and a 40% tax rate. It has $1.5 million in annual depreciation and has to make annual interest payments of $1 million. It also pays $500,000 a year into a sinking fund. ABC wishes to pay $2 a share dividend on its 250,000 shares. A bond covenant says it cannot do so unless its cash flow (before dividends and sinking fund requirements) exceeds the sum of dividends, interest and sinking fund payments.

a. Can ABC pay the dividend?

b. If yes, what is the maximum it can pay?