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Unformatted text preview: 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: C$80 – C$5 = C$75 b. A share repurchase will have no effect on price per share. c.The stock price will fall to: C$80 × 1/2 = C$40 d. The stock price will fall by a factor of 1.10 to: C$80/1.10 = C$72.73 16-1 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. 5. The manager cannot be correct. If all shareholders have the right to buy additional shares at the deep discount, then none of them individually can benefit. As the additional shares are sold at below-market prices, the share price will gradually fall, precisely offsetting the value of the discount. This is analogous to the firm issuing rights to existing shareholders to buy additional shares at a discount. The value of the right is offset by the fall in the share price. The firm cannot create value by selling discounted shares. One benefit of the program that the manager does not mention is that, if the DRIP elicits a significant cash inflow, then the firm may not need to issue equity in the future, thereby saving the costs of a future equity issue. 6. This statement is inconsistent with the concept of efficient markets. One cannot identify “the bottom of the market” until after the fact. In addition, if the firm pays a cash dividend, and the investor does not use the proceeds to purchase shares in the firm, then the investor has, in effect, reduced her investment in the firm: the value of her shares falls. This is no different from the situation an investor faces when selling enough shares to raise the same amount of cash....
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This note was uploaded on 10/18/2010 for the course MACAU macau taught by Professor Macau during the Spring '10 term at University of Macau.
- Spring '10