(Assessing the payment of dividends, LO 6) Dunsinane Ltd. (Dunsinane) is a publicly traded manufacturing company that makes computer components for resale to end-product manufacturers. Extracts from the last five years financial statements are shown on page 707.

Dunsinane completed an expansion in 2004 that was financed by a share issuance made in late 2003. Management believes that cash from operations should now be fairly stable and the net cash outflows on investing activities should range between

$900,000 and $1,500,000 per year. To date, Dunsinane has not faced the effects of any economic slowdowns. There is concern of the effects of a prolonged slowdown on Dunsinane’s revenues, income, and cash flow. Dunsinane has access to a

$1,000,000 line of credit secured against accounts receivable that it has not used to date. After two years of satisfactory and steady performance since the expansion was completed, the board of directors is considering a proposal to implement an annual common share dividend. Dunsinane has never paid dividends before.

Required:
Prepare a report to Dunsinane’s board of directors, assessing the pros and cons of implementing an annual common share dividend. Identify additional information that you would want to have to make a definitive decision. If you recommend that a dividend should be paid, what amount per share should be paid? Provide support for your positions.

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Assets Cash All other assets Total assets Liabilities 2006 2005 2004 2003 2002 $ 512,000 $ 375,000 $ 430,000 8,908,000 7,710,000 $9,420,000 $8,085,000 6,775,000 $7,205,000 $1,900,000. $ 175,000 4,500,000 3,050,000 $6,400,000 $3,225,000 $2,900,000 $2,600,000 $2,400,000 $2,200,000 $1,400,000 Shareholders' equity Capital stock (unlimited number of common shares authorized, 1,000,000 outstanding) 3,765,000 3,625,000 3,560,000 3,425,000 1,200,000 Retained earnings 2,755,000 1,860,000 1,245,000 775,000 625,000 Total shareholders' equity 6,520,000 Total liabilities and shareholders' equity $9,420,000 5,485,000 $8,085,000 4,805,000 4,200,000 $7,205,000 $6,400,000 1,825,000 $3,225,000 Extracts from the cash flow statement Cash from operations $1,130,000 $975,000 ($250,000) 2 ($75,000) $225,000 Cash spent on investing activities (765,000) (600,000) (1,550,000) (1,200,000) (900,000)