Question

Peggy Grey's Cookies has net income of $450. The firm pays out 30 percent of the net income to its shareholders as dividends. During the year, the company sold $90 worth of common stock. What is the cash flow to stockholders?

Answer 1

Answer: Cash flows to share holders are the cash flows net of dividends paid and cash received from the issue of common stock; cash flow to shareholders is $45.

We first calculate the dividends paid to share-holders.

We can calculate dividends received as:

`Dividends = Net Income * Dividend payout rate`

`Dividends = 450 * 0.30`

`Dividends = 135`

The cash flows to share holders are calculated as follows:

`Cash flow to share holders = Dividends paid - Net new issue of stock`

`Cash flow to share holders = 135 - 90`

`Cash flow to share holders = 45`