Unformatted text preview: tax effects, the stock price will drop by the amount of the dividend, so: PX = $47.50 – 1.60 = $45.90 The total dividends paid will be: $1.60 per share(8,000 shares) = $12,800 The equity and cash accounts will both decline by $12,800. 6. Repurchasing the shares will reduce shareholders’ equity by $12,800. The shares repurchased will be the total purchase amount divided by the stock price, so: Shares bought = $12,800/$47.50 = 269 And the new shares outstanding will be: New shares outstanding = 8,000 – 269 = 7,731 After repurchase, the new stock price is: Share price = $367,200/7,731 shares = $47.50 398 The repurchase is effectively the same as the cash dividend because you either hold a share worth $47.50 or a share worth $45.90 and $1.60 in cash. Therefore, you participate in the repurchase according to the dividend payout percentage; you are unaffected. 7. The stock price is the total market value of equity divided by the shares outstanding, so: P0 = $455,000 equity/20,000 shares = $22.75 per share The shares outstanding will increase by 25 percent, so: New shares outstanding = 20,000(1.25) = 25,000 The new stock price is the market value of equity divided by the new shares outstanding, so: PX = $455,000/25,000 shares = $18.20 8. With a stock dividend, the shares outstanding will increase by one plus the dividend amount, so: New shares outstanding = 380,000(1.12) = 425,600 The capital surplus is the capital paid in excess of par value, which is $1, so: Capital surplus for new shares = 45,600($44) = $2,006,400 The new capital surplus will be the old capital surplus plus the additional capital surplus for the new shares, so: Capital surplus = $1,750,000 + 2,006,400 = $3,756,400 The new equity portion of the balance sheet will look like this: Common stock ($1 value) Capital surplus Retained earnings 9. par $ 425,600 3,756,400 2,098,000 $6,280,000 The only equity account that will be affected is the par value of the stock. The par value will change by the ratio of old shares to new shares, so: New par value = $1(1/5) = $0.20 per share. The total dividends paid this year will be the dividend amount times the number of shares outstanding. The company had 380,000 shares outstanding before the split. We must remember to adjust the shares outstanding for the stock split, so: Total dividends paid this year = $0.60(380,000 shares)(5/1 split) = $1,140,000 The dividends increased by 10 percent, so the total dividends paid last year were: 399 Last year’s dividends = $1,140,000/1.10 = $1,036,363.64 400 And to find the dividends per share, we simply divide this amount by the shares outstanding last year. Doing so, we get: Dividends per share last year = $1,036,363.64/380,000 shares = $2.73 10. a. b. c. If the dividend is declared, the price of the stock will drop on the exdividend date by the value of the dividend, $5. It will then trade for $115. If it is not declared, the price will remain at $120. Mann’s outflows for investments are $3,000,000. These outflows occur immediately. One year from now, the firm will realize $1,400,000 in net income and it will pay $750,000 in dividends, but the need for financing is immediate. Mann must finance $3,000,000 through the sale of shares worth $120. It must sell $3,000,000 / $120 = 25,000 shares. The MM model is not realistic since it does not account for taxes, brokerage fees, uncertainty over future cash flows, investors’ preferences, signaling effects, and agency costs. Intermediate 11. The price of the stock today is the PV of the dividends, so: P0 = $0.95/1.14 + $45/1.142 = $35.46 To find the equal two year dividends with the same present value as the price of the stock, we set up the following equation and solve for the dividend (Note: The dividend is a two year annuity, so we could solve with the annuity factor as well): $35.46 = D/1.14 + D/1.142 D = $21.53 We now know the cash flow per share we want each of the next two years. We can find the price of stock in one year, which will be: P1 = $45/1.14 = $39.47 Since you own 1,000 shares, in one year you want: Cash flow in Year one = 1,000($21.53) = $21,534.11 But you’ll only get: Dividends received in one year = 1,000($0.95) = $950.00 Thus, in one year you will need to sell additional shares in order to increase your cash flow. The number of shares to sell in year one is: Shares to sell at time one = ($21,534.11 – 950)/$39.47 = 521.46 shares d. 401 At Year 2, your cash flow will be the dividend payment times the number of shares you still own, so the Year 2 cash flow is: Year 2 cash flow = $45(1,000 – 521.46) = $21,534.11 12. If you only want $500 in Year 1, you will buy: ($950 – 500)/$39.47 = 11.40 shares at Year 1. Your dividend payment in Year 2 will be: Year 2 dividend = (1,000 + 11.40)($45) = $45,513.00 Note that the present value of each cash flow stream is the same. Below we show this by finding the present values as: PV = $500/1.14 + $45,513/1.142 = $35,459.37 PV = 1,000($0.95)/1.14 + 1,000($45)/1.142 = $35,459.37 13. a. If the company makes a...
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This note was uploaded on 07/10/2010 for the course FIN 6301 taught by Professor Eshmalwi during the Spring '10 term at University of TexasTyler.
 Spring '10
 eshmalwi
 Finance, Corporate Finance

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