Question

On 12/31/2013, Heaton Industries Inc. reported retained earnings of $675,000 on its balance sheet, and it reported that it had $172,500 of net income during the year. On its previous balance sheet, at 12/31/2012, the company had reported $555,000 of retained earnings. No shares were repurchased during 2013.

           Required:

1. How much in dividends did Heaton pay during 2013?
2. Does dividends announcement affect the firm’s market value? Discuss.

Please explain briefly.

Thank you.

Answer 1

Given,

Current retained earnings = $675000

Net income = $172500

Previous retained earnings = $555000

Solution :-

(a)

Additions to retained earnings = current retained earnings - previous retained earnings

= $675000 - $555000 = $120000

Dividends paid during 2013 = Net income - additions to retained earnings

= $172500 - $120000 = $52500

(b)

Change in the dividend policy is often followed by the change in the market value of stocks. Stock prices tend to decline after announcement of increase in dividend. So, firm's market value would decline with the announcement of dividends.