# C if the firms policy were to pay 050 per share each

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Unformatted text preview: t ratio of 40% for all years with positive earnings and 0% otherwise, what would be the annual dividend for each year? CHAPTER 13 Dividend Policy 583 b. If the firm had a dividend payout of \$1.00 per share, increasing by \$0.10 per share whenever the dividend payout fell below 50% for two consecutive years, what annual dividend would the firm pay each year? c. If the firm’s policy were to pay \$0.50 per share each period except when earnings per share exceed \$3.00, when an extra dividend equal to 80% of earnings beyond \$3.00 would be paid, what annual dividend would the firm pay each year? d. Discuss the pros and cons of each dividend policy described in parts a through c. LG4 13–8 Alternative dividend policies Given the earnings per share over the period 1996–2003 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a through d. Year Earnings per share 2003 \$1.40 2002 1.56 2001 1.20 2000 0.85 1999 1.05 1998 0.60 1997 1.00 1996 0.44 a. Pay out 50% of earnings in all years with positive earnings. b. Pay \$0.50 per share and increase to \$0.60 per share whenever earnings per share rise above \$0.90 per share for two consecutive years. c. Pay \$0.50 per share except when earnings exceed \$1.00 per share, in which case pay an extra dividend of 60% of earnings above \$1.00 per share. d. Combine policies in parts b and c. When the dividend is raised (in part b), raise the excess dividend base (in part c) from \$1.00 to \$1.10 per share. e. Compare and contrast each of the dividend policies described in parts a through d. LG5 13–9 Stock dividend—Firm Columbia Paper has the following stockholders’ equity account. The firm’s common stock has a current market price of \$30 per share. Preferred stock Common stock (10,000 shares at \$2 par) Paid-in capital in excess of par Retained earnings Total stockholders’ equity \$100,000 20,000 280,000 100,000 \$500,000 a. Show the effects on Columbia of a 5% stock dividend. b. Show the effects of (1) a 10% and (2) a 20% stock dividend. 584 PART 4 Long-Term Financial Decisions c. In light of your answers to parts a and b, discuss the effects of stock dividends on stockholders’ equity. LG5 13–10 Cash versus stock dividend Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for \$4 per share. Preferred stock Common stock (400,000 shares at \$1 par) Paid-in capital in excess of par Retained earnings Total stockholders’ equity \$ 100,000 400,000 200,000 320,000 \$1,020,000 a. Show the effects on the firm of a cash dividend of \$0.01, \$0.05, \$0.10, and \$0.20 per share. b. Show the effects on the firm of a 1%, 5%, 10%, and 20% stock dividend. c. Compare the effects in parts a and b. What are the significant differences between the two methods of paying dividends? LG5 13–11 Stock dividend—Investor Sarah Warren currently holds 400 shares of NutriFoods. The firm has 40,000 shares outstanding. The firm most recently had e...
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