Franklin Co., a specialty retailer, has a history of paying quarterly dividends of $0.50 per share. Management is trying to determine whether the company will have adequate cash on December 31, 2015, to pay a dividend if one is declared by the board of directors. The following additional information is available:
- All sales are on account, and accounts receivable are collected one month after the sale. Sales volume has been increasing 5% each month.
- All purchases of merchandise are on account, and accounts payable are paid one month after the purchase. Cost of sales is 40% of the sales price. Inventory levels are maintained at $75,000.
- Operating expenses in addition to the mortgage are paid in cash. They amount to $3,000 per month and are paid as they are incurred.
Franklin Co. Balance Sheet September 30, 2015
|
Cash
|
$5,000
|
Accounts payable
|
$5,000
|
|
Accounts receivable
|
12,500
|
Mortgage note**
|
150,000
|
|
Inventory
|
75,000
|
Common stock-$1 par
|
50,000
|
|
Note receivable*
|
10,000
|
Retained earnings
|
66,500
|
|
Building/Land
|
169,000
|
Total liabilities and
|
|
|
Total assets
|
$271,500
|
stockholders' equity
|
$271,500
|
*Note receivable represents a one-year, 5% interest-bearing note due November 1, 2015.
**Mortgage note is a 30-year, 7% note due in monthly installments of $1,200.
Alternate Problems 95
Required:
Determine the cash that Franklin will have available to pay a dividend on December 31, 2015. Round all amounts to the nearest dollar. What can Franklin's management do to increase the cash available? Should management recommend that the board of directors declare a dividend? Explain.