ans-odd-problems-ch18

ans-odd-problems-ch18 - CHAPTER 18 DIVIDENDS AND OTHER...

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CHAPTER 18 DIVIDENDS AND OTHER PAYOUTS Solutions to Odd-Numbered Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. The aftertax dividend is the pretax dividend times one minus the tax rate, so: Aftertax dividend = $6.00(1 – .15) = $5.10 The stock price should drop by the aftertax dividend amount, or: Ex-dividend price = $80 – 5.10 = $74.90 3. a. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so: New shares outstanding = 10,000(4/1) = 40,000 The equity accounts are unchanged except that the par value of the stock is changed by the ratio of new shares to old shares, so the new par value is: New par value = $1(1/4) = $0.25 per share. b. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so: New shares outstanding = 10,000(1/5) = 2,000. The equity accounts are unchanged except that the par value of the stock is changed by the ratio of new shares to old shares, so the new par value is: New par value = $1(5/1) = $5.00 per share. 5. The stock price is the total market value of equity divided by the shares outstanding, so: P 0 = $175,000 equity/5,000 shares = $35.00 per share Ignoring tax effects, the stock price will drop by the amount of the dividend, so: P X = $35.00 – 1.50 = $33.50
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The total dividends paid will be: $1.50 per share(5,000 shares) = $7,500 The equity and cash accounts will both decline by $7,500. 7. The stock price is the total market value of equity divided by the shares outstanding, so: P 0 = $360,000 equity/15,000 shares = $24 per share The shares outstanding will increase by 25 percent, so: New shares outstanding = 15,000(1.25) = 18,750 The new stock price is the market value of equity divided by the new shares outstanding, so: P X = $360,000/18,750 shares = $19.20 9. 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 350,000 shares outstanding before the split. We must remember to adjust the shares outstanding for the stock split, so: Total dividends paid this year = $0.70(350,000 shares)(5/1 split) = $1,225,000 The dividends increased by 10 percent, so the total dividends paid last year were: Last year’s dividends = $1,225,000/1.10 = $1,113,636.36 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 = $1,113,636.36/350,000 shares = $3.18
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This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Fall '09 term at UMBC.

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ans-odd-problems-ch18 - CHAPTER 18 DIVIDENDS AND OTHER...

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