Chapter 5: Q5BP (page 596)

The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.
Turtle co.
Hare corp.
Growth rate in sales and earnings
22%
4%
Cash as a percentage of total assets
5
20

Short Answer

Expert verified

The Turtle co should have a low dividend pay-out, and the Hare corp. It should have a high dividend pay-out.

Step by step solution

Dividend policy of Turtle co.

The company should have a low dividend pay-out.The company is growing at a high rate, i.e. 22%, and the cash percentage is low. i.e., 5%, so it should pay a low dividend to utilise the remaining cash balance for reinvestment.

Dividend policy of Hare corp.

The company can have a high dividend pay-out.The company has a growth rate of 4%, which is low, and its cash percentage is 20% which is high. So, the company can have a high dividend payout ratio as it does not require a lot of cash for reinvestment purposes.

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In \( millions	In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder’s equity	\)80
Total assets	\(140	Total stockholder’s equity and liabilities	\)140

Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.
Turtle co.
Hare corp.
Growth rate in sales and earnings
22%
4%
Cash as a percentage of total assets
5
20

Short Answer

Step by step solution

Dividend policy of Turtle co.

Dividend policy of Hare corp.

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Nature of Business

Financial Performance

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	Turtle co.	Hare corp.
Growth rate in sales and earnings	22%	4%
Cash as a percentage of total assets	5	20

The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.Turtle co.Hare corp.Growth rate in sales and earnings22%4%Cash as a percentage of total assets520

Short Answer

Step by step solution

Dividend policy of Turtle co.

Dividend policy of Hare corp.

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Strategic Analysis

Business Case Studies

Business Development

Managers

Nature of Business

Financial Performance

Study anywhere. Anytime. Across all devices.

The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.
Turtle co.
Hare corp.
Growth rate in sales and earnings
22%
4%
Cash as a percentage of total assets
5
20