Raven Corporation has 4.8 million shares, 20% of which are cumulative preferred paying a fixed 5% of the $20 face value of the shares. The rest are common shares. Because of loan covenants, the company is restricted to paying out a maximum of 24% of its annual net income after tax in dividends or any dividends if after tax profit drops below $4.5 million. Over the past four years Raven has had net income after tax of $8 million, $6 million, $3 million, $6 million. What is the total value of dividends paid out to common shares in the past four years if the company tries to achieve a maximum payout?

Question

Quizplus · Accepted Answer

First, we need to calculate the maximum amount of dividends that Raven Corporation can pay out each year.
Maximum payout = 24% of net income after tax
If net income after tax is less than $4.5 million, then no dividends can be paid out.

Using the given net income after tax values for the past four years, we get:

- Year 1: Maximum payout = 24% of $8 million = $1.92 million
- Year 2: Maximum payout = 24% of $6 million = $1.44 million
- Year 3: No dividends can be paid out because net income after tax is only $3 million
- Year 4: Maximum payout = 24% of $6 million = $1.44 million

Now let's calculate the dividends paid out to common shares in each year:
- Year 1: Total dividend = Net income after tax - Preferred dividends = $8 million - (0.20 x 4.8 million x $20 x 5%) = $7.04 million. Maximum payout allowed is $1.92 million, so common shares receive $1.92 million and preferred shares receive the rest ($5.12 million).
- Year 2: Total dividend = Net income after tax - Preferred dividends = $6 million - (0.20 x 4.8 million x $20 x 5%) = $5.04 million. Maximum payout allowed is $1.44 million, so common shares receive $1.44 million and preferred shares receive the rest ($3.6 million).
- Year 3: No dividends can be paid out because net income after tax is only $3 million.
- Year 4: Total dividend = Net income after tax - Preferred dividends = $6 million - (0.20 x 4.8 million x $20 x 5%) = $5.04 million. Maximum payout allowed is $1.44 million, so common shares receive $1.44 million and preferred shares receive the rest ($3.6 million).

Total dividends paid out to common shares over the four-year period = $1.92 million + $1.44 million + $0 + $1.44 million = $4.8 million.

Therefore, the correct answer is C) $1.44 million.

Raven Corporation Has 4