HW13_Answers - Q13-1. What fraction of U.S. public...

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Q13-1. What fraction of U.S. public companies pays regular cash dividends today? How has this changed over the past 50 years? A13-1. Less than 20% of publicly traded U.S. companies pay regular cash dividends today. During the 1950s, over 80% of publicly listed U.S. companies paid regular cash dividends. Q13-5. What is a stock dividend? How does this differ from a stock split? A13-5. A stock dividend is a distribution of new stock to existing investors, usually instead of a cash dividend. Shareholders who originally owned say, 100 shares, might receive an extra five shares as a stock dividend, giving them 105 shares in total. Since everyone receives the same proportional distribution, however, this “dividend” has no real value and the firm’s stock price should decline by roughly the amount of the stock dividend (5% in the example above), leaving the overall market value of the firm’s stock unchanged. In a two-for-one stock split, the number of shares outstanding is doubled and every stockholder receives one new share for each they already owned. The firm’s stock price should fall by half (say from $100 per share to $50), though empirical evidence shows that it typically falls by less than half (perhaps only to $52 per share). In a four-for-one split, the number of shares in quadrupled and each investor receive three new shares for each one they originally owned, so he or she owns four shares where previously they owned one. In this case, the stock price should fall by three-fourths (from $100 to $25 per share), though again empirical evidence shows that the average fall is less than this (perhaps to $26/share). Stock splits and dividends also differ in their accounting treatment, with the per share par value of the firm’s stock being unaffected in the shareholders equity accounts after a stock dividend, but with par value being cut in half by a two-for-one stock split. Companies usually split their stock once the price has increased out of a preferred target range, and the managers wish to reduce the per share price back to a level that will attract more individual investors. Q13-8.
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This note was uploaded on 08/02/2008 for the course BUSFIN 1030 taught by Professor Zutter during the Spring '08 term at Pittsburgh.

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HW13_Answers - Q13-1. What fraction of U.S. public...

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