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Long-Term Financing/ Dividend Policy and Retained Earnings

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Why is the cash position of a company important, when deciding to create a dividend policy?

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The cash position of a company is an important factor when deciding to create a dividend policy. The amount of dividend paid by the company may have positive or negative information content for the stock market. Therefore, a company would like to pay more dividends to send positive signals to the market. However, the company would like to retain a substantial portion of the earnings of ...

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This post discusses why is the cash position of a company important, when deciding to create a dividend policy.

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The Optimal Scam Company would like to see its sales grow at 20 percent for the foreseeable future. Its financial statements for the current year are presented below.

Income Statement ($ millions) Balance Sheet ($ millions)
Sales 32.00 Current assets 16
Costs 28.97 Fixed assets 16
Gross profit 3.03 Total assets 32
Taxes 1.03
Net income 2.00 Current debt 10
Long-term debt 4
Dividends 1.40 Total debt 14
Retained earnings 0.60 Common stock 14
Ret. earnings 4
Total liabilities and equity 32

The current financial policy of the Optimal Scam Company includes
Dividend-payout ratio (d) = 70%
Debt-to-equity ratio (L) = 77.78%
Net profit margin (P) = 6.25%
Assets-sales ratio (T) =1

Determine Optimal Scam's need for external funds next year.
Construct a pro forma balance sheet for Optimal Scam.
Calculate the sustainable growth rate for the Optimal Scam Company.
How can Optimal Scam change its financial policy to achieve its growth objective?

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