Question

In your discussions with the CFO you have talked about the impact of a dividend on your company’s market price and financial statements. He has asked that you and your team evaluate the impact of issuing a dividend. Use the income statement and balance sheet provided to make recommendation for the amount of dividend (if any). How are retained earnings impacted and what does this mean for the organization? Compute the Internal Growth Rate and Sustainable Growth Rate using current (2015) financial information and then a second scenario; if we issue a dividend payment of $3 million. Explain your thought process and rationale for a recommended dividend strategy. Concept Check: Dividends are distributions of profits to your investors who placed their capital at risk for you. Theoretically every company should eventually provide a dividend distribution to their investors.

ACME's Financial Statements
	2014	2015	Change
Total Assets	435,750,000.00	459,225,000.00	23,475,000.00
Average Total Assets		447,487,500.00
Common Stock	122,000,000.00	122,000,000.00	-
Preferred Stock	16,725,000.00	16,725,000.00	-
Accumulated Retained Earnings	27,001,000.00	31,698,000.00	4,697,000.00
Total Owner's Equity	165,726,000.00	170,423,000.00	4,697,000.00
Net Income		7,045,000.00

Answer 1

Particulars	2014	2015
Accumulated Retained Earnings	27001000	31698000
Common Stock	122000000	122000000
Preferred Stock	16725000	16725000
Total Owner Equity (All of Above)	165726000	170423000

We have to identify Growth rate, growth rate means a maximum rate of growth in sales and assets that a company can achieve using only retained earnings.

Internal growth rate= Change in Earing/Change in Asset

=4697000/23475000*100

=20%

Internal Growth rate=20%

Dividend Payout Ratio=Dividend / Change in earings=3000000/4697000*100=64%

Retention Ratio=100-64=36%

Sustainable Growth rate=20%*36%=7.2%