If a firm reports $25 million of retained earnings on its balance shee

If a firm reports $25 million of retained earnings on its balance sheet, could the board of directors declare a $25 million cash dividend without any concerns? Explain why or why not

What will be an ideal response?

ANSWER

The retained earnings on a firm’s balance sheet represents the accumulation of net income over time that was not paid out as dividends. When realized, the R/E were not necessarily a cash flow thus we cannot assume cash is equal to the R/E figure. Further, the R/E are a source of internal funding used to finance existing assets. Thus, paying out R/E as dividends would almost certainly cause concerns.