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Unformatted text preview: the firm could pay on
common stock before and after the stock split? (Assume that legal capital
includes all paid-in capital.)
d. Contrast your answers to parts a through c with the circumstances surrounding a 50% stock dividend.
e. Explain the differences between stock splits and stock dividends. LG5 LG6 13–15 Stock dividend versus stock split—Firm The board of Wicker Home Health
Care, Inc., is exploring ways to expand the number of shares outstanding in
order to reduce the market price per share to a level that the firm considers more 586 PART 4 Long-Term Financial Decisions appealing to investors. The options under consideration are a 20% stock dividend and, alternatively, a 5-for-4 stock split. At the present time, the firm’s
equity account and other per share information are as follows:
Common stock (100,000 shares at $1 par)
Paid-in capital in excess of par
Total stockholders’ equity
Price per share
Earnings per share
Dividend per share $ 0
$1.08 a. Show the effect on the equity accounts and per-share data of a 20% stock
b. Show the effect on the equity accounts and per-share data of a 5-for-4 stock
c. Which option will accomplish Wicker’s goal of reducing the current stock
price while maintaining a stable level of retained earnings?
d. What legal constraints might encourage the firm to choose a split over a
LG6 13–16 Stock repurchase The following financial data on the Bond Recording Company are available:
Earnings available for common stockholders
Number of shares of common stock outstanding
Earnings per share ($800,000 400,000)
Market price per share
Price/earnings (P/E) ratio ($20 $2) $800,000
10 The firm is currently considering whether it should use $400,000 of its earnings
to pay cash dividends of $1 per share or to repurchase stock at $21 per share.
a. Approximately how many shares of stock can the firm repurchase at the $21per-share price, using the funds that would have gone to pay the cash dividend?
b. Calculate the EPS after the repurchase. Explain your calculations.
c. If the stock still sells at 10 times earnings, what will the market price be after
d. Compare the pre- and post-repurchase earnings per share.
e. Compare and contrast the stockholders’ positions under the dividend and
repurchase alternatives. What are the tax implications under each
LG6 13–17 Stock repurchase Harte Textiles, Inc., a maker of custom upholstery fabrics, is
concerned about preserving the wealth of its stockholders during a cyclic down- CHAPTER 13 Dividend Policy 587 turn in the home furnishings business. The company has maintained a constant
dividend payout of $2.00 tied to a target payout ratio of 40%. Management is
preparing a share repurchase recommendation to present to the firm’s board of
directors. The following data have been gathered from the last two years: 2002
Earnings available for common stockholders...
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