Question

The Hastings Sugar Corporation has the following pattern of net income each year, and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of dividends. Year Net Income Profitable Capital Expenditure 1 $14 million $ 8 million 2 18 million 11 million 3 9 million 6 million 4 20 million 8 million 5 23 million 9 million The Hastings Corporation has 2 million shares outstanding (The following questions are separate from each other).

c. If the firm pays a 20 percent stock dividend in years 2 through 5, and also pays a cash dividend of $2.40 per share for each of the five years, how much in total dividends will be paid?
  

d. Assume the payout ratio in each year is to be 30 percent of net income and the firm will pay a 20 percent stock dividend in years 2 through 5. How much will dividends per share for each year be? (Assume cash dividend is paid after the stock dividend). (Round your answers to 2 decimal places.)
Year Dividends per share

1.

2.

3.

4.

5.

Answer 1

c).

Year	Shares outstanding	Dividends Per Share($)	Dividends($)
(a)	(b)	(c)	(d) = (b) x (c)
1	2,000,000	2.40	4,800,000
2	2,000,000 x 1.20 = 2,400,000	2.40	5,760,000
3	2,400,000 x 1.20 = 2,880,000	2.40	6,912,000
4	2,880,000 x 1.20 = 3,456,000	2.40	8,294,400
5	3,456,000 x 1.20 = 4,147,200	2.40	9,953,280

Total Cash Dividends $35,719,680

d).

Year	Net Income($)	Payout Ratio	Dividends($)	Shares	Dividends Per Share($)
(a)	(b)	(c)	(d) = (b) x (c)	(e)	(f) = (d) / (e)
1	14,000,000	0.30	4,200,000	2,000,000	2.10
2	18,000,000	0.30	5,400,000	2,400,000	2.25
3	9,000,000	0.30	2,700,000	2,880,000	0.94
4	20,000,000	0.30	6,000,000	3,456,000	1.74
5	23,000,000	0.30	6,900,000	4,147,200	1.66