Calculate the payout ratio and return on common stockholders’ equity: Common Sto

Question

Calculate the payout ratio and return on common stockholders’ equity:

Common Stock ($10 par value, 66,900 shares issued and outstanding) $669,000

Paid-in Capital in Excess of Par Value 482,200

Retained Earnings 645,900

During the year, the following transactions occurred.

Jan. 15 Declared a $0.50 cash dividend per share to stockholders of record on January 31, payable February 15.

Feb. 15 Paid the dividend declared in January.

Apr. 15 Declared a 10% stock dividend to stockholders of record on April 30, distributable May 15. On April 15, the market price of the stock was $14 per share.

May 15 Issued the shares for the stock dividend.

Dec. 1 Declared a $0.60 per share cash dividend to stockholders of record on December 15, payable January 10, 2015.

Dec. 31 Determined that net income for the year was $361,800.

Explanation / Answer

Answer

Payout ratio = Dividend/Net Income

Payout ratio = 171264/361800

Payout ratio = 47.33%

Return on common stockholders’ equity = net income/Average Total Common Stock Holders Equity

Return on common stockholders’ equity = 361800/1939198

Return on common stockholders’ equity = 18.66%

Working

Beginning

Common Stock ($10 par value, 66,900 shares issued and outstanding) $669,000

Paid-in Capital in Excess of Par Value 482,200

Retained Earnings 645,900

Beginning Total Common Stock Holders Equity = 669000+482200+645900

Beginning Total Common Stock Holders Equity = 1797100

Dividend = Cash Dividend on Jan 15 + stock dividend on Apr 15 + Cash Dividend on Dec 1

Dividend = 0.50*66900 + 10%*66900*14 + (66900+10%*66900)*0.60

Dividend = $ 171264

At the end of the year

Common Stock = 669000 + 66900*10%*10

Common Stock = 735900

Paid-in Capital in Excess of Par Value = 482200 + ( 66900*10%*(14-10))

Paid-in Capital in Excess of Par Value = 508960

Retained Earnings = Beginning Retained Earning + Net Income - Total Dividend

Retained Earnings = 645900+361800- 171264

Retained Earnings = 836436

Ending Total Common Stock Holders Equity = 735900+508960+836436

Ending Total Common Stock Holders Equity = 2081296

Average Total Common Stock Holders Equity = (Beginning Total Common Stock Holders Equity + Ending Total Common Stock Holders Equity)/2

Average Total Common Stock Holders Equity = (1797100+2081296)/2

Average Total Common Stock Holders Equity = $ 1,939,198

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