Question

Q 11.26: The board of directors of Testa Incorporated has decided that they would like to declare a $400,000 cash dividend at some point in the near future. The company currently has Retained Earnings of $2,419,000 and a Cash balance of $827,000. They also have current liabilities totaling $436,000. What is missing in order for Testa to be able to pay a cash dividend

Answer 1

Answer: B. : a healthy cash reserve

Explanation:

For the company to be able to declare a Dividend, it's cash reserve needs to be healthy. For this to happen use the following formula;

Free cash balance = Available cash balance - Current Liabilities payable

= 827,000 - 436,000

= $391,000

After taking out the money that will be needed to pay the Current Liabilities, there would be an insufficient balance to pay off the Dividends of $400,000.

Their cash reserve is not healthy enough for the dividends to be declared.