Question

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

(\(000 omitted)
	2018	2017	2016	2015	2014
Sales revenue	\)20,000	\(16,000	\)14,000	\(6,000	\)4,000
Net income	2,400	14,000	800	700	250
Average total assets	22,000	19,000	11,500	4,200	3,000
Current assets	8,000	6,000	3,000	1,200	1,000
Working capital	3,600	3,200	1,200	500	400
Common shares: Number of shares Outstanding (000) Average market price	2,000 \(9	2,000 \)6	2,000 $4	20 -	20 -

Instructions

1. Comment on the appropriateness of declaring a cash dividend at this time, using the ratios computed in part (b) as a major factor in your analysis.

Short answer

The company's operating condition appears to be improving, and it appears to be able to pay a dividend.

Step-by-step solution

Meaning of Cash Dividend

The cash dividend is paid from the net profit of the company for the financial year. It is not necessary for a firm to declare dividends; alternatively, the funds can be used for the company's other development efforts.

Explaining the appropriateness of declaring a cash dividend

The market price of the shares has not been given full recognition to the increase in return on assets, the profit margin on sales, and earnings per share.This indicates that market forces are having a negative impact on the stock market price.

It is possible that the relatively low market value of the shares is due to the fact that dividends have not been paid in the past.It may be stated that the company's operational condition is improving and that it seems to be able to pay a dividend.

However, it would be prudent to examine as far as possible the additional internal and external aspects listed in part (a) of the matter.

For 2018, a dividend in the range of 12 to 36 cents per share, or 10% to 30% of profits per share, seems reasonable. $240,000 ($0.12 X 2,000,000) to $720,000 ($0.36 X 2,000,000) will be required in cash. Payments in excess of $720,000 have a significant negative impact on working capital. At the average 2018 market price, this would result in between 1.3 and 4%.