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Planetary Travel Co. has $240,000,000 in stockholders' equity. Eighty million dollars is listed as common stock and the balance is in retained earnings. The firm has $500,000,000 in total assets and 2 percent of this value is in cash. Earnings for the year are $40,000,000 and are included in retained earnings.

a. What is the legal limit on current dividends?

b. What is the practical limit based on liquidity?

c. If the company pays out the amount in part b, what is the dividend payout ratio? (Compute this based on total dollars rather than on a per share basis because the number of shares is not given.)

Payout ratio: Dividends/Earnings

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The solution explains the legal limit and practical limit on dividend payments

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a. The legal limit on current dividends is the amount of retained earnings with the firm. The total dividend cannot exceed the amount of retained earnings. Total ...

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