Question

Use the income statement and balance sheet provided to make recommendation for the amount of dividend (if any). How are retained earnings impacted and what does this mean for the organization?

Compute the Internal Growth Rate and Sustainable Growth Rate using current (2015) financial information and then a second scenario; if we issue a dividend payment of $3 million.

Explain your thought process and rationale for a recommended dividend strategy.

Concept Check: Dividends are distributions of profits to your investors who placed their capital at risk for you. Theoretically every company should eventually provide a dividend distribution to their investors.

CME Iron	Balance Sheet
Assets
Current assets:	2014	2015	change
Cash	500,000	600,000	100,000
Investments	1,000,000	1,025,000	25,000
Inventories	110,000,000	117,000,000	7,000,000
Accounts receivable	11,750,000	12,500,000	750,000
Pre-paid expenses	2,500,000	2,600,000	100,000
Other	0	0	-
Total current assets	125,750,000	133,725,000	7,975,000
Fixed assets:	2014	2015	change
Property and equipment	165,000,000	175,000,000	10,000,000
Leasehold improvements	0	0	-
Equity and other investments	55,000,000	65,000,000	10,000,000
Less accumulated depreciation	15,000,000	15,500,000	500,000
Total fixed assets	235,000,000	255,500,000	20,500,000
Other assets:	2014	2015	change
Goodwill	75,000,000	70,000,000	(5,000,000)
Total other assets	75,000,000	70,000,000	(5,000,000)
Total assets	435,750,000	459,225,000	23,475,000
Liabilities and owner's equity
Current liabilities:	2014	2015	change
Accounts payable	40,500,000	42,400,000	1,900,000
Accrued wages	85,000,000	90,500,000	5,500,000
Accrued compensation	10,000,000	10,855,000	855,000
Income taxes payable	4,024,000	4,697,000	673,000
current portion of LT debt	5,500,000	10,350,000	4,850,000
Other	0	0	-
Total current liabilities	145,024,000	158,802,000	13,778,000
Long-term liabilities:	2014	2015	change
Long term debt	125,000,000	130,000,000	5,000,000
Total long-term liabilities	125,000,000	130,000,000	5,000,000
Owner's equity:	2014	2015	change
Common stock	122,000,000	122,000,000	-
Preferred stock	16,725,000	16,725,000	-
Accumulated retained earnings	27,001,000	31,698,000	4,697,000
Total owner's equity	165,726,000	170,423,000	4,697,000
Total liabilities and owner's equity	435,750,000	459,225,000	23,475,000

Income Statement

ACME Iron

December 2015

Financial Statements in '000s of U.S. Dollars

REVENUE
Gross Sales	250,000
Less: Sales Returns & Allowances	2,500
Net Sales	247,500
COST OF GOODS SOLD
Beginning Inventory	7,500
Add: Purchases	4,500
Freight-in	-
Direct Labor	75,000
Indirect Expenses	15,000
Inventory Available	102,000
Less: Ending Inventory
Cost of Goods Sold	102,000
Gross Profit (Loss)	145,500
EXPENSES
Advertising	7,500
Amortization	-
Bad Debts	5,000
Depreciation	500
Dues and Subscriptions	-
Employee Benefit Programs	18,750
Insurance	2,500
Interest	10,350
Legal & Professional Fees	100
Licenses & Fees	-
Miscellaneous	10
Office Expenses	100
Payroll Taxes	5,625
Postage	3
Rent	-
Repairs & Maintenance	5,000
Supplies	2,000
Telephone	120
Travel	1,750
Utilities	50,000
Vehicle Expenses	450
Wages	25,000
Total Expenses	134,758
Net Operating Income	10,742
OTHER INCOME
Gain (Loss) on Sale of Assets	-
Interest Income	1,000
Total Other Income	1,000
TAXES	4,697
Net Income (Loss)	7,045