LEC5-tutorial and Assignment questions

LEC5-tutorial and Assignment questions - 634 20 Part IV...

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Unformatted text preview: 634 20. Part IV Capital Structure and Dividend Policy preference exists. a firm can boost its share price by increasing its dividend payout ratio. Explain the fallacy in this argument. Dividends and Stock Price Empirical research has found that there have been significant increases in stock price on the day an initial dividend (i.e., the first time a firm pays a cash dividend) is announced. What does this finding imply about the information content of initial dividends? Questions and Problems connect ‘- [FINANCE BASIC (Questions I—IO) 5. Dividends and Taxes Lee Ann, Inc.. has declared a $9.50 per-share dividend. Suppose capital gains are not taxed. but dividends are taxed at 15 percent. New [RS regulations require that taxes be withheld when the dividend is paid. Lee Ann sells for $115 per share, and the stock is about to go exdividend. What do you think the cit-dividend price will be? Stock Dividends The owners” equity accounts for Hexagon International are shown here: $ 30.000 I85,000 627,500 $842,500 Common stock ($l par value) Capital surplus Retained earnings Total owners' equity a. If Hexagon stock currently sells for $37 per share and a 10 percent stock divi- dend is declared. how many new shares will be distributed? Show how the equity accounts would change. 13. if Hexagon declared a 25 percent stock dividend. how would the accounts change? Stock Splits change if: For the company in Problem 2. show how the equity accounts will a. Hexagon declares a four~for-one stock split. How many shares are outstanding now? What is the new par value per share? b. Hexagon declares a one-for-five reverse stock split. How many shares are out- standing now? What is the new par value per share? Stock Splits and Stock Dividends Roll Corporation (RC) currently has 330.000 shares of stock outstanding that sell for $64 per share. Assuming no market imperfections or tax effects exist. what will the share price be after: at. RC has a five-for-three stock split? b. RC has a 15 percent stock dividend? c. RC has a 42.5 percent stock dividend? (1. RC has a four-for-seven reverse stock split? Determine the new number of shares outstanding in parts (a) through (d). Regular Dividends The balance sheet for Levy Corp. is shown here in market value terms. There are 12.000 shares of stock outstanding. Market Value Balance Sheet Cash $ 55.000 Equity $465,000 Fixed assets 4 | 0.000 Total $465,000 Total $465,000 Chapter I9 Dividends and Other Payouts 635 "(Wont been t lime Ul the idend. tr IRS It sells 'ik the :1] are 8. .' divi- Equity range? ts will .nrling ti' out- :0000 Ha I'kel value INTEi'ttvtEDIATE I l.. lQUesrrons iI—lé) The company has declared a dividend of $1.90 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects. what is the stock selling for today? What will it sell for tomorrow"? What will the balance sheet look like after the dividends are paid? Share Repurchase In the previous problem. suppose Levy has announced it is going to repurchase 522.800 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase? Ignorin g tax effects. show how the share repurchase is effectively the same as a cash dividend. Stock Dividends The market value balance sheet for Ontbox Manufacturing is shown here. Outbox has declared a stock dividend of 25 percent. The stock goes exdividend tomorrow [the chronology for a stock dividend is similar to that for a cash dividend). There are 20.000 shares of stock outstanding. What wiil the ex-dividend price he? Market Value Balance Sheet Cash $295,000 Debt :5 1 80,000 Fixed assets 540,000 Equity 655,000 Total $835,000 Total $835,000 Stock Dividends The company with the common equity accounts shown here has declared a stock dividend of 15 percent when the market value of its stock is $45 per share. What effects on the equity accounts will the distribution of the stock dividend have? $ 4] 0.000 2. f 50,000 5,320,000 $7,880,000 Common stock ($I par value) Capital surplus Retained earnings Total owner‘s' equity Stock Splits In the previous problem. suppose the company instead decides on a five-for-onc stock split. The lirtn's 45 cent per share cash dividend on the new (postsplit) shares represents an increase of It) percent over last years dividend on the presplit stock. What effect does this have on the equity accounts? What was last year‘s dividend per share? Dividends and Stock Price The Mann Company belongs to a risk class for which the appropriate discount rate is 10 percent. Mann currently has 220.000 outstanding shares selling at $1 [0 each. The firm is cmttemplating the declaration of a $4 dividend at the end of the fiscal year that just began. Assume there are no taxes on dividends. Answer the tbllowing questions based on the Miller and Modigliani model. which is discussed in the text. a. What will be the price of the stock on the ex-dividend date if the dividend is declared? b. What will be the price of the stock at the end of the year if the dividend is not declared? c. It" Mann makes $4.5 million of new investments at the beginning of the period. earns net income of $1.9 million. and pays the dividend at the end of the year. how many shares of new stock must the firm issue to meet its funding needs? d. ls it realistic to use the MM model in the real world to value stock? Why or why not? Homemade Dividends You own [.000 shares of stock in Avondale Corporation. You will receive a dividend of $1.10 per share in one year. In two years. Avondale will pay a liquidating dividend of $56 per share. The required return on Avondale 636 CHALLENGE (Questions I7—20) Part IV Capital Structure and Dividend Policy 12. 13. 14. 16. 17. stock is 14 percent. What is the current share price of your stock (ignoring taxes)? If you would rather have equal dividends in each of the next two years. show how you can accomplish this by creating homemade dividends. (Hint: Dividends will be in the form of an annuity.) Homemade Dividends In the previous problem. suppose you want only $500 total in dividends the lirst year. What will your homemade dividend be in two years? Stock Repurchase Flychucker Corporation is evaluating an extra dividend vergus a share repurchase. In either case $4.000 would be spent. Current earnings am 32.10 per share. and the stock currently sells for $46 per share. There are 800 Shares outstanding. Ignore taxes and other imperfections in answering parts (at) and to). a. Evaluate the two alternatives in terms of the elTect on the price per share ol‘ the stock and shareholder wealth. b. What will be the efl‘ect on .Flychucker‘s EPS and PE ratio under the two dill‘erent scenarios? c. In the real world. which ol‘ these actions would you recommend? Why? Dividends and Firm Value The net income of Novis Corporation is 5385.000. The company has 25.000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is 31.725300. The appropriate discount rate for Nevis is 12 percent. and the dividend tax rate is zero. a. What is the current value of the firm assuming the current dividend has not yet been paid? I). What is the ex—dividend price of Novis's stock if the board follows its current policy? c. At the dividend declaration meeting. several board members claimed that the dividend is too meager and is probably depressing Novis's price. They proposed that Novis sell enough new shares to finance a $4.60 dividend. i. Comment on the claim that the low dividend is depressing the stock price. Sup- port your argument with. calculations. ii. [1‘ the proposal is adopted. at what price will the new shares sell? How many will be sold? Dividend Policy Gibson Co. has a current period cash flow of $1.1 million and pays no dividends. The present value of the company‘s future cash Flows is $15 million. The company is entirely financed with equity and has 600.000 shares outstanding. Assume the dividend tax rate is zero. a. What is the share price of the Gibson stock? 13. Suppose the board of directors of Gibson Co. announces its plan to pay out 50 percent of its current cash [low as cash dividends to its shareholders. How can .IelT Milier. who owns 1.000 shares 01‘ Gibson stock. achieve a zero payout policy on his own? Dividend Smoothing The Sharpe Co. just paid a dividend of $1.80 per share of stock, Its target payout ratio is 40 percent. The company expects to have an earnings per share of $4.95 one year from now. a. II" the adjustment rate is .3 as defined in the Lintner model. what is the dividend one year from now? I). If the adjustment rate is .6 instead. what is the dividend one year from now? c. Which adjustment rate is more Conservative? Why? Expected Return, Dividends, and Taxes The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 5.5 percent. Suppose the capital gains tax rate is zero. whereas the dividend tax rate is 35 percent. Gecko has an expected earnings growth rate of. ...
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