Finance Assignment

RUNNING HEAD: TEAM 1 TASK 7 1

TEAM 1 TASK 7 4

TASK 7

Team 1:

Adetolani Adeosun

Lawrence Henderson

Ayoub Mfinanga

Brittany Raines

Matthias Wurster

Memo to CFO

Executive Summary:

Dividends are issued to the company’s shareholders and can be paid either in cash or by issuing additional shares of stock. Dividends can impact the company’s market price and financial statements. They impact the shareholders’ equity section of the balance sheet, specifically, the retained earnings. After all of the company’s obligations have been paid, the amount of money the company has left is called the retained earnings. During this task, we were asked to evaluate the impact of issuing a dividend. The company cannot grow significantly by distributing dividends and relying on growth from either internal earnings or by raising debt. The company should not use the income to distribute dividends, and should look for raising equity and retire debt.

Analysis: Ayoub

Earning For 2015 = $4,697,000

Earning for the Year	$4,697,000.00
Less: Dividend	$3,000,000.00
Retention	$1,697,000.00
Retention Ratio	$1,697,000/$4,697,000 = 36.13%
Total owner's equity	$170,423,000.00
Earning for the Year	$4,697,000.00
Return on Equity	$4,697,000/$170,423,000 = 2.76%

Internal Growth Rate = Retention Ratio*ROE

=0.3613*0.0276 =0.00997188*100=0.997188 = 1%

Dividend Payout ratio affects the growth rate of business, as dividend payout ratio increase retention ratio goes down consequently internal growth rate will decrease. Dividend decision should be made based on availability of return and class of shareholders. If Shareholders belong to high class profile then they might not find interest in dividend, while lower and middle-class shareholders are interested in the dividends to meet their routine expenses.

Conclusion:

After a profitable period, an organization can (at the decision-making level of the board of directors) pay a portion of its dividends to investors as profits, and keep the rest of held income. Note that either activity (dividends or retained earnings) meets the textbook meaning of a profit making the organization's central goal: increasing owner’s value.