5. (Dividend constraints) A firm has $ 800 000 in paid-in capital, retained earnings of $40 000 (including the current year'í earnings) and 25 000 ordinary shares. In the current year, it has $29 000 of earnings available for the ordinary shareholders.
(a) What is the most the firm can pay in cash dividends to each ordinary shareholder? (Assume that legal capital includes all paid-up capital.
(b) What effect would a cash dividend of $0.80 per share have on the firmís balance sheet entries?
c) if the firm cannot raise any new funds from external sources, what do you consider to be the key constraint with respect to the magnitude of the firmís dividend payments? Why?
(a) the most the company can pay is $29 000/25 000= $1.16
(b) $0.80 x 25 000 = $20 000
retained earning would go from 29 000 to 9000
and paid-capital would go from 800 000 to 780 000
(c) the key constrain would be growth aspect.
can you please check if I have answered this questions correctly?