Motion Designs Inc. has paid quarterly cash dividends since 20Y7. These dividends have steadily increased from $0.05 per share to the latest dividend declaration of $0.50 per share. The board of directors would like to continue this trend and is hesitant to suspend or decrease the amount of quarterly dividends. Unfortunately, sales dropped sharply in the fourth quarter of 20Y8 due to worsening economic conditions and increased competition. As a result, the board is uncertain as to whether it should declare a dividend for the last quarter of 20Y8. On October 1, 20Y8, Motion Designs Inc. borrowed $4,000,000 from Valley National Bank to use in modernizing its retail stores and to expand its product line in response to changes in its industry. The terms of the 10-year, 6% loan require Motion Designs to do the following: • Pay monthly interest on the last day of the month • Pay $400,000 of the principal each October 1, beginning in 20Y9 • Maintain a current ratio (current assets ÷ current liabilities) of 2 • Maintain a minimum balance (a compensating balance) of $100,000 in its Valley National Bank account On December 31, 20Y8, $1,000,000 of the $4,000,000 loan had been disbursed in modernization of the retail stores and in expansion of the product line. Motion Designs Inc.’s balance sheet as of December 31, 20Y8, follows: Motion Designs Inc. Balance Sheet December 31, 20Y8 Assets Current assets: Cash ......................................... $ 250,000 Marketable securities .......................... 3,000,000 Accounts reveivable ........................... $ 800,000 Allowance for doubtful accounts ............... (50,000) Accounts receivable, net .................... 750,000 Inventory .................................... 2,980,000 Prepaid expenses ............................. 20,000 Total current assets ........................ $ 7,000,000 Property, plant, and equipment: Land ......................................... $1,500,000 Buildings ..................................... $ 5,050,000 Accumulated depreciation—buildings ............ (1,140,000) Buildings, book value ...................... 3,910,000 Equipment ................................... $ 3,320,000 Accumulated depreciation equipment .......... (730,000) Equipment, book value ..................... 2,590,000 Total property, plant, and equipment ...... 8,000,000 Total assets ...................................... $15,000,000 Liabilities Current liabilities: Accounts payable ............................. $ 1,590,000 Notes payable (Valley National Bank) ............ 400,000 Salaries payable ............................... 10,000 Total current liabilities ...................... $2,000,000 Long-term liabilities: Notes payable (Valley National Bank) ............ 3,600,000 Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,600,000 Stockholders’ Equity Paid-in capital: Common stock, $25 par (200,000 shares authorized, 180,000 shares issued) ............$ 4,500,000 Excess of issue price over par ................... 270,000 Total paid-in capital ........................ $4,770,000 Retained earnings ................................ 4,630,000 Total stockholders’ equity ......................... 9,400,000 Total liabilities and stockholders’ equity ............. $15,000,000 The board of directors is scheduled to meet January 10, 20Y9, to discuss the results of operations for 20Y8 and to consider the declaration of dividends for the fourth quarter of 20Y8. The chairman of the board, Matt Cengage, has asked for your advice on the declaration of dividends. Write a brief memo to the chairman of the board, outlining the factors that the board should consider in deciding whether to declare a cash dividend.
Motion Designs Inc. has paid quarterly cash dividends since 20Y7. These dividends have steadily increased from $0.05 per share to the latest dividend declaration of $0.50 per share. The board of directors would like to continue this trend and is hesitant to suspend or decrease the amount of quarterly dividends. Unfortunately, sales dropped sharply in the fourth quarter of 20Y8 due to worsening economic conditions and increased competition. As a result, the board is uncertain as to whether it should declare a dividend for the last quarter of 20Y8.
On October 1, 20Y8, Motion Designs Inc. borrowed $4,000,000 from Valley National Bank to use in modernizing its retail stores and to expand its product line in response to changes in its industry. The terms of the 10-year, 6% loan require Motion Designs to do the following:
• Pay monthly interest on the last day of the month
• Pay $400,000 of the principal each October 1, beginning in 20Y9
• Maintain a
• Maintain a minimum balance (a compensating balance) of $100,000 in its Valley National Bank account
On December 31, 20Y8, $1,000,000 of the $4,000,000 loan had been disbursed in modernization of the retail stores and in expansion of the product line.
Motion Designs Inc.’s balance sheet as of December 31, 20Y8, follows:
Motion Designs Inc.
Balance Sheet
December 31, 20Y8
Assets
Current assets:
Cash ......................................... $ 250,000
Marketable securities .......................... 3,000,000
Accounts reveivable ........................... $ 800,000
Allowance for doubtful accounts ............... (50,000)
Inventory .................................... 2,980,000
Prepaid expenses ............................. 20,000
Total current assets ........................ $ 7,000,000
Property, plant, and equipment:
Land ......................................... $1,500,000
Buildings ..................................... $ 5,050,000
Buildings, book value ...................... 3,910,000
Equipment ................................... $ 3,320,000
Accumulated depreciation equipment .......... (730,000)
Equipment, book value ..................... 2,590,000
Total property, plant, and equipment ...... 8,000,000
Total assets ...................................... $15,000,000
Liabilities Current liabilities:
Accounts payable ............................. $ 1,590,000
Notes payable (Valley National Bank) ............ 400,000
Salaries payable ............................... 10,000
Total current liabilities ...................... $2,000,000
Long-term liabilities:
Notes payable (Valley National Bank) ............ 3,600,000
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,600,000
Stockholders’ Equity Paid-in capital:
Common stock, $25 par (200,000 shares authorized, 180,000 shares issued) ............$ 4,500,000
Excess of issue price over par ................... 270,000
Total paid-in capital ........................ $4,770,000
Total stockholders’ equity ......................... 9,400,000
Total liabilities and stockholders’ equity ............. $15,000,000
The board of directors is scheduled to meet January 10, 20Y9, to discuss the results of operations for 20Y8 and to consider the declaration of dividends for the fourth quarter of 20Y8. The chairman of the board, Matt Cengage, has asked for your advice on the declaration of dividends.
Write a brief memo to the chairman of the board, outlining the factors that the board should consider in deciding whether to declare a cash dividend.
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