is exploring ways to expand the number of shares

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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: Preferred stock Common stock (100,000 shares at $1 par) Paid-in capital in excess of par Retained earnings Total stockholders’ equity Price per share Earnings per share Dividend per share $ 0 100,000 900,000 700,000 $1,700,000 $30.00 $3.60 $1.08 a. Show the effect on the equity accounts and per-share data of a 20% stock dividend. b. Show the effect on the equity accounts and per-share data of a 5-for-4 stock split. 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 stock dividend? 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) $800,000 400,000 $2 $20 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 the repurchase? 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 alternative? 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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