Hamilton Plastics-Dividends - HOCK international

Hamilton Plastics – Dividends

Hamilton Plastics was organized by Don Tenney in 1984 to manufacture special parts for the auto industry. By the early 1990’s, Hamilton’s two plants were operating at full capacity. As a result of concern over the future of the automotive industry, Hamilton Plastics diversified into other industries and has since maintained a record of modestly steady growth. Hamilton Plastics initially issued a public offering in 2003. At that time, Don Tenney stepped down as the company president; however, he has continued as the chairman of the Board of Directors. During the last ten years, Hamilton Plastics has maintained a steady dividend policy with a modest increase that approximates the company’s growth. The Board of directors met during January 2013 to establish Hamilton’s objectives for the fiscal year beginning June 1, 2013. The agenda included a discussion of the continuation of the company’s dividend payment policy, the acquisition of land for a new plant, and a major upgrade of Hamilton’s computer installations. The estimated costs of the two capital projects are as follows. Land for a new plant Upgrade of computer installations Total

$210,000 1,320,000 $1,530,000

Each of these projects had received prior approval from the Finance Committee of the Board of Directors, but the funds were not expected to be spent until the 2013-2014 fiscal year. Both projects are to be financed out of the 2013-2014 net income. The liabilities and shareholders’ equity section of Hamilton’s Statement of Financial Position at May 31, 2013 is below. Hamilton Plastics’ effective income tax rate is 40 percent. Hamilton Plastics Liabilities and Shareholders’ Equity May, 31, 2013 ($000 omitted) Liabilities Accounts payable Unearned revenue Bonds payable 8 percent (due in 2017) Total liabilities

$850 300 6,000 7,150

Shareholders’ equity Preferred stock, 9 percent cumulative, $100 par, 30,000 shares authorized, issued, and outstanding (Note 1)

3,000

Common stock, $2.50 par, 1,500,000 Shares authorized, 900,000 shares issued and outstanding

2,250

Paid-in capital in excess of par value

6,420

Retained earnings

6,180

Total shareholders’ equity Total liabilities and shareholders’ equity

17,850 $25,000

Note 1 – the preferred stock dividend has been paid through May 31, 2013

Hamilton Plastics – Dividends Required 1. For the year ending May 31, 2014, compute the minimum amount of Hamilton Plastics’ earnings before interest and income taxes that would be required to cover the capital projects of $1,530,000 that are to be financed out of current earnings while covering the payment of all appropriate dividends, including cash to common shareholders equal to 25 percent of net income. 2. Discuss the advantages and the disadvantages of a steady dividend policy.