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    Dividend Policy: legal limit, practical limit

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    A firm has $120,000 in stockholders' equity. Earnings for the year are $20,000 and are included in retained earnings. Forty thousand dollars is listed as common stock and the balance is in retained earnings. The firm has $250,000 in total assets and 3 percent of this value is in cash.

    1. Figure legal limit on current dividends.
    2. Figure practical limit based on liquidity.
    3. If the company pays out the amount in part (2), figure the dividend payout ratio. (Answer should be based on total dollars rather than on a per share basis since the number of shares is not given)

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    Solution Preview

    1. Figure legal limit on current dividends.

    The legal limit is based on the total retained earnings of the firm. The total amount of dividends that can be paid out should not exceed the total amount of retained earnings. Total stockholders equity is ...

    Solution Summary

    The solution explains how to determine the legal limit and the practical limit for the amount of dividends that can be paid