What effect if any will the dividend have on the

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Unformatted text preview: anding and has set a payment date of July 31. Prior to the dividend declaration, the firm’s key accounts were as follows: Cash a. b. c. d. e. $500,000 Dividends payable Retained earnings $ 0 2,500,000 Show the entries after the meeting adjourned. When is the ex dividend date? What values would the key accounts have after the July 31 payment date? What effect, if any, will the dividend have on the firm’s total assets? Ignoring general market fluctuations, what effect, if any, will the dividend have on the firm’s stock price on the ex dividend date? LG1 13–2 Dividend payment Kathy Snow wishes to purchase shares of Countdown Computing, Inc. The company’s board of directors has declared a cash dividend of $0.80 to be paid to holders of record on Wednesday, May 12. a. What is the last day that Kathy can purchase the stock (trade date) in order to receive the dividend? b. What day does this stock begin trading “ex dividend”? c. What change, if any, would you expect in the price per share when the stock begins trading on the ex dividend day? d. If Kathy held the stock for less than one quarter and then sold it for $39 per share, would she achieve a higher investment return by (1) buying the stock prior to the ex dividend date at $35 per share and collecting the $0.80 dividend, or (2) buying it on the ex dividend date at $34.20 per share but not receiving the dividend? LG2 13–3 Residual dividend policy As president of Young’s of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company’s dividend policy. In fact, the stockholder has asked you to estimate the amount of the dividend that you are likely to pay next year. You have not yet collected all the information about the expected dividend payment, but you do know the following: (1) The company follows a residual dividend policy. (2) The total capital budget for next year is likely to be one of three amounts, depending on the results of capital budgeting studies that are currently under way. The capital expenditure amounts are $2 million, $3 million, and $4 million. CHAPTER 13 Dividend Policy 581 (3) The forecasted level of potential retained earnings next year is $2 million. (4) The target or optimal capital structure is a debt ratio of 40%. You have decided to respond by sending the stockholder the best information available to you. a. Describe a residual dividend policy. b. Compute the amount of the dividend (or the amount of new common stock needed) and the dividend payout ratio for each of the three capital expenditure amounts. c. Compare, contrast, and discuss the amount of dividends (calculated in part b) associated with each of the three capital expenditure amounts. LG3 13–4 Dividend constraints The Howe Company’s stockholders’ equity account is as follows: Common stock (400,000 shares at $4 par) Paid-in capital in excess of par Retained earnings Total stockholders’ equity $1,600,000 1,000,000 1,900,000 $4,500,000 The earnings av...
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This document was uploaded on 01/19/2014.

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