chap016solutions - Solutions for Chapter 16 Dividend Policy...

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Solutions for Chapter 16 Dividend Policy 1. a. May 7: Declaration date June 6: Last with-dividend date June 7: Ex-dividend date June 11: Record date July 2: Payment date b. The stock price will fall on the ex-dividend date, June 7. The price falls on this day because, as the stock goes ex-dividend, the shareholders are no longer entitled to receive the dividend. c. The annual dividend is: $0.075 × 4 = $0.30 The dividend yield is: $0.30/$27 = 0.0111 = 1.11% d. The percentage payout rate was: $0.30/$1.90 = 0.1579 = 15.79% e.A 10 percent stock dividend is equivalent to a 1.10 for 1 stock split. The number of shares outstanding increases by 10%, while the firm’s assets are unchanged. The stock dividend therefore will reduce the stock price to: $27/1.10 = $24.55 2. a.True. b. True. c. True. The effective rate can be less than the stated rate because the realization of gains can be deferred, which reduces the present value of the tax obligation. d. False. Corporations are taxed on 30 percent of dividends received from other corporations. 3. a.The stock price will fall to: $80 × 4/5 = $64 b. The stock price will fall by a factor of 1.25 to: $80/1.25 = $64 c.A share repurchase will have no effect on price per share. 16-1
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4. Your dividend income will increase from $1,500 to $2,000. If you view the dividend as excessive, you can invest the extra $500 in the firm. Use part of the dividend proceeds to buy 5 shares of stock at $100 per share. When the stock goes ex-dividend, the share price will fall by $1.00 instead of $.75, but you will increase the number of shares you hold, and thereby offset the impact of the higher payout policy.
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