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Dividend constraints A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year's earnings), and 25,000 shares of common stock outstanding.
Dividend constraints |
A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year's earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earnings. |
1) What is the most the firm can pay in cash dividends to each common stockholder? (Assume that legal capital includes all paid-in capital.) |
2) How would an $0.80/share dividend affect the firm's balance sheet? |
3) If the firm cannot raise new external funds, what do you consider the key constraint with respect to the magnitude of the firm's dividend payments? Why? |
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