Dividend constraints
The Howe Company's stockholders' equity account is as follows:
Common stock (600,000 shares at $4 par) $2,400,000
Paid-in capital in excess of par 3,000,000
Retained earnings 1,700,000
Total stockholders' equity $7,100,000
The earnings available for common stockholders from this period's operations are $100,000, which have been included as part of the $1.71 million retained earnings.
a. What is the maximum dividend per share that the firm can pay? (Assume that legal capital includes all paid-in capital.)
b. If the firm has $180,000 in cash, what is the largest per-share dividend it can pay without borrowing?
c. Indicate the accounts and changes, if any, that will result if the firm pays the dividends indicated in parts a and b.
d. Indicate the effects of an $80,000 cash dividend on stockholders' equity.