Transcribed Image Text
Dividend distributionYou have recently been appointed CEO of Dumbledore Ltd., awholesale distributor of magic supplies. One day your CFO remindsyou that next week you will have to make recommendations to theboard of directors regarding this year’s annual dividend. Thiscatches you totally by surprise. Luckily, the CFO was kind enoughto provide you with some additional information. He shows you theprojected income statement and balance sheet, without the effect ofany dividend declaration.Income Statement:Sales..............................................44,000,000COGS.............................................29,400,000Grossprofit.........................................14,600,000Operatingexpenses..................................6,000,000Operating income beforeinterest.......................8,600,000Interestexpense.....................................1,000,000Income beforetax...................................7,600,000Income tax(30%)....................................2,300,000Net income.........................................5,300,000Statement of Financial Position:Current AssetsCash..............................................4,000,000Accountsreceivable..................................5,000,000Inventory...........................................2,000,000Other..............................................3,700,000Total CurrentAssets.................................14,700,000Long-term investments................................7,000,000Property, plant and equipment(net).....................17,000,000TotalAssets........................................38,700,000Current LiabilitiesAccountspayable....................................2,000,000Accruedliabilities....................................3,000,000Other..............................................4,000,000Total CurrentLiabilities...............................9,000,000Non-currentliabilities.................................16,000,000Shareholders’ EquityCommon shares.....................................1,000,000Contributedsurplus..................................4,900,000Retained earnings (includes this year’s netincome).........7,800,000Total Shareholders’Equity.............................13,700,000Total Liabilities andEquity................................38,700,000Other information:1)Last year, the net income was $3,500,000, and $3,300,000 cashdividends were paid.2)Dumbledore has two debt agreements that call for thecorporation to maintain at least $2,500,000 in retained earnings,as well as maintain a debt-to-total-assets ratio of no more than70%.3)There has been no change in the number of shares outstandingduring the year.You start to think about the recommendations you are going tomake. It is the end of November, and historically the corporationhas declared dividends five days before the end of the year.Instructionsa)What factors will limit the amount to be distributed asdividends?b)What are important considerations in your decision? What wouldyou recommend?Provide any journal entry that is related to yourdecision.
Other questions asked by students
You recently started an entry-level job in sales and customer service at a large Canadian telecom...
| |