Problem:
Planetary Travel Co. has $240,000,000 in stockholder equity. Eighty million dollars is listed as common stock and the balance is in retained earnings. The firm has $500,000,000 in total assets and 2 percent of this value is in cash. Earnings for the year are $40,000,000 and are included in retained earnings.
Required:
Question 1: What is the legal limit on current dividends?
Question 2: What is the practical limit based on liquidity?
Question 3: If the company pays out the amount in part b, what is the dividend payout ratio? (Compute this based on total dollars rather than on a per share basis because the number of shares is not given.)
Payout ratio = Dividends/Earnings
Explain comprehensively and provide step by step solution.