39 rohter galeano inc is considering how to set its

39. Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of
$3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity.
The company forecasts that its net income this year will be $3,500,000. If the company follows a
residual dividend policy, what will be its total dividend payment?
a. $205,000
b. $500,000
c. $950,000
d. $2,550,000
e. $3,050,000
ANS: C
The amount of new investment which must be financed with equity is:
$3,000,000  85% = $2,550,000.
Since the firm has $3,500,000 of net income, $950,000 = $3,500,000 $2,550,000 will be left for
dividends.
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-7
NAT: BUSPROG: Analytic STA: DISC: Dividend policy

LOC: TBA TOP: Residual dividend policy – nonalgorithmic
KEY: Bloom’s: Application MSC: TYPE: Multiple Choice: Problem
NOT: With some combinations of variables, the residual policy may result in zero dividends and a
zero payout ratio. These outcomes are noted in the topic [TOP] field if applicable.
40. Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to
maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net
income this year will be $1,800,000. If the company follows a residual dividend policy, what will be
its total dividend payment?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
e. $500,000
ANS: E
The amount of new investment which must be financed with equity is:
$2,000,000  65% = $1,300,000.
Since the firm has $1,800,000 of net income only $500,000 = $1,800,000 $1,300,000 will be left for
dividends.
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-7
NAT: BUSPROG: Analytic STA: DISC: Dividend policy
LOC: TBA TOP: Residual dividend policy – nonalgorithmic
KEY: Bloom’s: Application MSC: TYPE: Multiple Choice: Problem
NOT: With some combinations of variables, the residual policy may result in zero dividends and a
zero payout ratio. These outcomes are noted in the topic [TOP] field if applicable.
41. Yesterday, Berryman Investments was selling for $90 per share. Today, the company completed a 7-
for-2 stock split. If the total market value was unchanged by the split, what is the price of the stock
today?
a. $23.21
b. $24.43
c. $25.71
d. $27.00
e. $28.35
ANS: C
Number of new shares
Number of old shares
Old (pre-split) price
New price = Old price  (Old shrs/New shrs)
$25
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-13
NAT: BUSPROG: Analytic STA: DISC: Dividend policy
LOC: TBA TOP: Stock splits – fractional splits KEY: Bloom’s: Application
MSC: TYPE: Multiple Choice: Problem
NOT: With some combinations of variables, the residual policy may result in zero dividends and a
zero payout ratio. These outcomes are noted in the topic [TOP] field if applicable.

42. Last week, Weschler Paint Corp. completed a 3-for-1 stock split. Immediately prior to the split, its
stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things
held constant, what is the best estimate of the stock's post-split price?
a. $50.00
b. $52.50
c. $55.13
d. $57.88
e. $60.78
ANS: A
Number of new shares
Number of old shares
Pre-split stock price $
Post-split stock price: P
0
/New per old = $50
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-13
NAT: BUSPROG: Analytic STA: DISC: Dividend policy
LOC: TBA TOP: Stock splits – simple splits KEY: Bloom’s: Application
MSC: TYPE: Multiple Choice: Problem
NOT: With some combinations of variables, the residual policy may result in zero dividends and a
zero payout ratio. These outcomes are noted in the topic [TOP] field if applicable.