In this workout, we're being asked to calculate the maximum amount of dividends a structure can pay to the equity holders of the holding company. The structure consists of an operating company that contains the project as well as the cash flows from that project.

Now here, the operating company has a retained earnings balance, which is negative 40, and this is because of accrued losses due to interest charges in the early years of the project. Now, keep in mind, this is the balance sheet of the operating company at the beginning of the year. However, the company now in the operational phase is profitable. And you can see here that the following year, the net income of the operating company is 50. Now, we also have a holding company with one key investment, and that is the investment in the operating company. Note that the holding company does not have any cash surplus that it could use to pay dividends. So we are assuming that all of the dividends that the holding company can pay out to equity holders will come from the operating company. Now, let's calculate the maximum amount of dividends that the operating company could pay to the holding company, and in this case, that will be equal to the 50 net income for the year, plus the negative 40 retain earnings balance, and that's equal to 10. Now, what that means is that the operating company can only pay dividends to the holding company in the amount of 10, even though the operating company has a cash balance of 50, and this is what we call a dividend trap. So if the holding company does not have any cash surplus and they can only pay dividends based on the cash flows received from the operating company, then the maximum amount of dividends that the holding company can pay to the equity holders is also equal to 10.