The financial condition of GreyCo Inc. is expressed in the following accounting

Question

The financial condition of GreyCo Inc. is expressed in the following accounting equation:

                        Assets                          = Liabilities + Common Stock + Retained earnings

            $800 Cash + $9,200 Land       = $7,000      +      $2,000          +         $1,000

a.       Determine the maximum dividend GreyCo can pay.

b.       Suppose the land sinks into the sea as a result of an earthquake and resulting tsunami.  The business is then liquidated.  How much cash will creditors receive?  How much cash will investors receive? (Assume there are no legal fees or other costs of liquidation.)

Explanation / Answer

The company has $1,000 in retained earnings but it can only pay $800 in cash dividends ($800/2000) = 40 Cents dividend per common stock.

B. The total asset remaining = $800 but GreyCo own $7,000 in liabilities. GreyCo must pay the creditors in full first before paying the creditors and since the company does not have enough asset to pay the creditors in full, the investors will get zero payment. The creditors will recieve ($800/7000) = 11.43 cents for every dollar invested for a total of $800.

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