Task: Dividend constraints
A firm with 25,000 common shares outstanding has $800,000 of common share financing and $40,000 of retained earnings (including the current year's invested earnings) on the balance sheet. In the current year, the firm has $29,000 of earnings available for the common shareholders.
Q1. What is the most the firm can pay in cash dividends to each common shareholder?
Q2. What effect would a cash dividend of $0.80 per share have on the firm's balance sheet entries?
Q3. If the firm cannot raise any new funds from external sources, what do you consider to be the key constraint with respect to the magnitude of the firm's dividend payments? Why?