Dividend Policy Decisions

Friendly Corp had a banner year with earnings of $ 3 million. Those earnings made their Retained Earnings balance jumped to $ 5 million. The rest of the Balance Sheet is:

Cash Accounts Payable Accounts Receivable Goodwill Property, Plant and Equipment L/T Debt Common Stock Retained Earnings

Required:

$ 250,000 350,000 500,000

1,850,000 6,000,000 1,250,000 2,000,000 5,000,000

a. Should the board declare a $ 1 million cash dividend in 6 months because of its earnings record year?

b. Assuming Friendly Corp pays $ 1 million cash dividend, what would be the earnings retention rate? Why is this metric important?

c. If the stock price is $ 50 would you buy this stock? Why?