The Daily News has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. Assume the company will have net sales of $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?

Question

The Daily News has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. Assume the company will have net sales of  $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?

Quizplus · Accepted Answer

The amount of dividends to be distributed can be calculated as: 
Dividends = Net income x Dividend payout ratio 
Dividends = $272,600 x 0.28 = $76,328 
However, since the question asks for the cash flow to stockholders, we need to take into account the tax rate. 
Cash flow to stockholders = Dividends x (1 - Tax rate) 
Cash flow to stockholders = $76,328 x (1 - 0.21) = $60,000.72 
Therefore, the cash flow to stockholders will be $1,328 (since the company sold $75,000 worth of stock, which we assume is the total number of outstanding shares).

The Daily News Has Projected Annual Net Income of $272,600