SOLUTIONS CHAPTER 18

SOLUTIONS CHAPTER 18 - CHAPTER 18 DIVIDEND POLICY AND...

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CHAPTER 18 DIVIDEND POLICY AND RETAINED EARNINGS 18-1 Dividend payout ratio = ( Earnings - Retained Funds) ÷ Earnings = ( \$70,000 - \$21,000) ÷ \$70,000 = 0.70 18-2 Common stock (1,380 shares at \$10 par) \$13,800 Capital surplus [\$7,000 + (\$18 - \$10)(180)] 8,440 Retained earnings [\$23,000 - (\$18)(180)] 19,760 Net worth \$42,000 18-3 (a) Weighted average cost of capital = 0.4 x 2.5% + 0.5 x 6% + 0.1 x 10% = 5% (b) Dividends should not be paid because the firm's profitable investment opportunities require more money than its current earnings. 18-4 ___________________________________________________________ Cash \$52,000Common stock (1,100 shares at \$10 par) \$11,000 Capital surplus 21,000 Retained earnings 20,000 18-5 (a) Earnings available for dividends = \$200,000 x 0.5 = \$100,000 Dividends per share = \$100,000 ÷ 25,000 = \$4 (b) The market price of the stock = \$10 + \$4 = \$14 (c) The funds required to buy 5,000 shares = 5,000 x \$10 = \$50,000 Dividend per share = (\$100,000 - \$50,000) ÷ 20,000 = \$2.5 (d) New earnings per share = \$200,000 ÷ 20,000 = \$10 Market price = \$10 x 1.25 = \$12.5 per share Total value to remaining stockholders = \$12.5 + \$2.5 = \$15 a share The repurchase of Walker's shares would increase the price of the stock by \$1 and thus the shares should be repurchased. 18-6 (a) Paid-in surplus + retained earnings = \$25,000 + \$15,000 = \$40,000

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(b) \$10,000 (c) Cash and accounts receivable will decrease by \$5,000 each and retained earnings will decrease by \$10,000. Thus, the company will have the following balance sheet after the \$10,000 dividend payment. Cash \$10,000 Accounts payable \$25,000 Receivables 20,000 Common stock 35,000 Inventory 40,000 Paid-in surplus 25,000 Fixed assets 20,000 Retained earnings 5,000 Total assets \$90,000 Total claims \$90,000 18-7 It is obvious that the market prices of these two stocks depend on dividend payments. It is important to note that the average dividend per share for both companies is \$1.75. However, the average market price for Company A's stock (\$13.80 a share) has been approximately 31 percent lower that for Company B's stock (\$18.20 a share). Company A has paid a constant percentage of its earnings (50%); this indicates why its dollar dividend has fluctuated directly with earnings. In contrast, Company B has paid \$1.75 per share every year. As Chapter 18 pointed out, investors tend to place a positive utility on dividend stability. Because such a policy reduces the investor's uncertainty, it consequently increases the stock price. T
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SOLUTIONS CHAPTER 18 - CHAPTER 18 DIVIDEND POLICY AND...

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