Question

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?

Answer 1

Answer:

1a.  Wednesday, December 18, 2013.

1b.  $14.65

1c.  $81.95 million

2a.  Company ABC can't pay dividend.

2b. Company ABC can't pay dividend.

Explanation:

1a.

The payment date is Friday, December 20, 2013. The registration date is generally two days before payment, that is Wednesday, December 18, 2013.

1b.

Stock price on the ex-dividend date = stock price - dividend = $15 - $0.35 = $14.65

1c.

Cash = $8 million  

Retained earnings = $75 million  

Outstanding share = 3 million  

Dividend out flow = $1,050,000 = $1.05 million  

Total assets = cash + retained earnings + dividend out flow = $8 million + $75 million - $1.05 million= $81.95 million

2a.

EBIT = $2 million  

Tax rate = 40%  

Annual deprecation = $1.5 million  

Annual interest = $1 million  

Sinking fund = $0.5 million  

Dividend out flow = $2 x 250,000 outstanding shares = $500,000 = $0.5 million.

Bond covenant condition:

Dividends = Dividend out flow + interest + sinking fund = $0.5 million + $1 million + $0.5 million = $2 million.

Cash flow before dividend and sinking payment = Dividends - Interest = $2 million - $1 million = $1 million  

Company ABC can't pay dividend because it don't satisfy bond covenant condition.

2b.

Company ABC can't pay dividend.

Hope this helps!