Stardate: 2967.0706 Aboard the Starship Enterprise

Doctor Leonard "Bones" McCoy held a Tribble in his hand, and he held it the way a man who is not yet a father holds a baby -- afraid he might drop it, unaccustomed as he was to its shape and size.

The furry little fuzz-ball was, at this moment, a demonstration item. McCoy was being pitched on an investment idea. Cyrano Jones was the pitcher.

"Ever since Lieutenant Uhura returned from Deep Space Station K-7 in 2267, I know you've had the wrong idea about tribbles. Believe me, Doctor, they're the perfect pet. You just need to know how to manage their birth rate."

"Dammit Jones! I'm a doctor, not a midwife!" said Bones.

"That's my point. I believe I've perfected a way to keep them from multiplying. I've found a way to reduce their ability to procreate."

"What are you telling them? Just say 'no?'"

"It's been tested. It works fine. It stimulates the Tribblian equivalent of the hypothalamus. There. There's a medical term for you. Dammit, you are a doctor aren't you?"

Bones scowled at him.

"The company is going gangbusters. We have two million in retained earnings already, and we're issuing a dividend for two million. What more evidence could you want that this is a sound investment?"

"Dammit Jones! I'm a doctor! Not an investor!"

At that moment yeoman Motli Fool strolled in and both mens' heads turned, from some deep hormonal common place.

"Thank goodness you're here, Yeoman!" cried the good Doctor. "You know something about investing!"

Can a company with $2 million retained earnings pay a $2 million cash dividend?

1) Of course, it has $2 million retained earnings and can pay all of it out.
2) No, because if it reduces retained earnings to zero, the company will fail.
3) No, because it is illegal to pay out all of a company's retained earnings.
4) We cannot tell from the information given.

The answer is 4) We cannot tell from the information given.

A company can pay a $2 million cash dividend only if it has that much cash. Companies do not pay dividends "out of," or "with," retained earnings, they pay dividends in cash. (Companies can also pay dividends in kind, such as DuPont once did by giving its stockholders shares of General Motors it owned, but these are very rare.) Retained earnings is not a "fund," and cannot be "used" for anything. It is an accounting abstraction.

Companies also pay dividends in stock, which is the subject of later episodes. A company's dividend-paying ability is limited by both its cash and its retained earnings. In most jurisdictions it is not legal to pay a dividend that will drop retained earnings below zero. A negative balance in retained earnings is called a deficit.

Answer 2 is not true, but companies avoid paying dividends that will reduce retained earnings to near-zero.

On hearing this information, Bones turned to Jones.

"Well?" said Bones. "Do you have that much cash on hand?"

"Doctor!" said Jones, affecting a look of horror. "Do I look like the sort of person who might do something underhanded? My word is my bond!"

Their conversation, however, was cut short as a terrible shudder ripped through the Enterprise, throwing them all to the floor. It was accompanied by a high-pitched squeal so loud that the one mirror in the room shattered into a thousand pieces.

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