Question 1

New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio?
Capital budget
$7,500
% Debt
35%
Net income (NI)
$6,500

Accepted Answer

The answer of New Orleans Builders Inc. has the following...

Question 2

Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $900,000. If the company follows the residual dividend model, how much dividends will it pay or, alternatively, how much new stock must it issue?

Accepted Answer

The answer of Pavlin Corp.'s projected capital budget is $2,000,000,...

Question 3

Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?

Accepted Answer

To get from $175 per share to $25 per share, the stock price needs to be decreased by a factor of 7. Therefore, a 7-for-1 stock split would be required, which means each shareholder would receive 7 new shares for every 1 old share they own. 7.00 is the closest answer choice.

Question 4

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? $$\begin{array} { l r } 
\text { Capital budget } & \$ 5,000 \
\% \text { Debt } & 45 \% \
\text { Net income (NI) } & \$ 5,300
\end{array}$$

Accepted Answer

The residual dividend model states that dividends are paid out of the residual earnings after capital expenditures and debt obligations have been met. In this case, the capital budget is $5,000, the debt is 45%, and the net income is $5,300. The residual earnings are $5,300 - $5,000 = $300. The debt obligation is 45% of $5,300 = $2,385. Therefore, the residual dividend is $300 - $2,385 = -$2,085. The dividend payout ratio is -$2,085 / $5,300 = -39.34%. However, dividend payout ratios cannot be negative, so the correct answer is 0%.

Question 5

LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?
Capital budget
$5,000
% Debt
45%
Net income (NI)
$7,000

Accepted Answer

Under the residual dividend model, dividends are paid out from the residual or leftover equity after all capital expenditures are funded. The equity portion of the capital budget is 55% (100% - 45% debt), which is $2,750 (55% of $5,000). The residual income available for dividends is $7,000 - $2,750 = $4,250. The dividend payout ratio is $4,250 / $7,000 = 60.71%.

Question 6

NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out? $$\begin{array} { l r } 
\text { Capital budget } & \$ 1,500,00 \
\% \text { Debt } & 65 \% \
\text { Net income (NI) } & \$ 550,000
\end{array}$$

Accepted Answer

Under the residual dividend model, dividends are paid from the residual or leftover equity after all capital expenditures are funded. The equity portion needed for the capital budget is 35% (100% - 65% debt) of $1,500,000, which is $525,000. The net income is $550,000, so the residual available for dividends is $550,000 - $525,000 = $25,000.

Question 7

Walter Industries is a family owned concern. It has been using the residual dividend model, but family members who hold a majority of the stock want more cash dividends, even if that means a slower future growth rate. Neither the net income nor the capital structure will change during the coming year as a result of a dividend policy change to the indicated target payout ratio. By how much would the capital budget have to be cut to enable the firm to achieve the new target dividend payout ratio? $$\begin{array} { l r } 
\% \text { Debt } & 35 \% \
\% \text { Equity } = 1.0 - \% \text { Debt } & 65 \% \
\text { Capital budget under the residual dividend model } & \$ 5,000,000 \
\text { Net income; it will not change this year even if dividends increase } & \$ 3,500,000 \
\text { Equity to support the capital budget = \% Equity } \times \text { Capital budget } & \$ 3,250,000 \
\text { Dividends paid = NI - Equity needed } & \$ 250,000 \
\text { Currently projected dividend payout ratio } & 7.1 \% \
\text { Target dividend payout ratio } & 70.0 \%
\end{array}$$

Accepted Answer

The answer of Walter Industries is a family owned concern....

Question 8

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Accepted Answer

The answer of Whited Products recently completed a 4-for-1 stock...

Question 9

Ross-Jordan Financial has suffered losses in recent years, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?

Accepted Answer

The answer of Ross-Jordan Financial has suffered losses in recent...

Question 10

Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. Your boss, the CFO, wants to know how the capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. You obtained the following data, which shows the firm's projected net income (NI), its current capital structure and dividend payout policies, and three possible new policies. Projected net income for the coming year will not be affected by a policy change. How much larger could the capital budget be if (1) the target de ratio were raised to the indicated amount, other things held constant, (2) the target payout ratio were lowered to the indicated amount, other things held constant, or (3) the debt ratio and dividend payout were both changed by the indicated amounts?

Accepted Answer

The answer of Del Grasso Fruit Company has more positive...

Question 11

Sheehan Corp. is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend per share. It finances with debt and common equity, but it wants to avoid issuing any new common stock during the coming year. Given these constraints, what percentage of the capital budget must be financed with debt?

Accepted Answer

The answer of Sheehan Corp. is forecasting an EPS of...

Question 12

Grullon Co. is considering a 7-for-3 stock split. The current stock price is $75.00 per share, and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that should follow the split. What is the stock's expected price following the split?

Accepted Answer

Before the split, the firm has 3/7 as many shares as it would have after the split. Therefore, the current market value of the firm is:

$75 x (number of shares before split) = $75 x (3/7)(number of shares after split)

After the split, the total market value of the firm is expected to increase by 5%, so:

$75 x (number of shares before split) x 1.05 = $75 x (7/3)(number of shares before split)

Setting these two expressions equal to each other, we can solve for the expected price after the split:

$75 x (3/7)(number of shares after split) = $75 x (7/3)(number of shares before split)

$75 x (3/7)(number of shares after split) = $75 x (7/3)(3/7)(number of shares after split)

$75 x (3/7)(number of shares after split) = $25 x (number of shares after split)

Expected price after split = $25

Therefore, the expected price after the split is $25 per share, which is equivalent to $75/3. So, the correct answer is B) $33.75.

Quiz 14: Distributions to Shareholders: Dividends and Share Repurchases

New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio? Capital budget $7,500 % Debt 35% Net income (NI) $6,500

Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $900,000. If the company follows the residual dividend model, how much dividends will it pay or, alternatively, how much new stock must it issue?

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? $\begin{array} { l r } \text { Capital budget } & \$ 5,000 \\\% \text { Debt } & 45 \% \\\text { Net income (NI) } & \$ 5,300\end{array}$

LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget $5,000 % Debt 45% Net income (NI) $7,000

NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out? $\begin{array} { l r } \text { Capital budget } & \$ 1,500,00 \\\% \text { Debt } & 65 \% \\\text { Net income (NI) } & \$ 550,000\end{array}$

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Grullon Co. is considering a 7-for-3 stock split. The current stock price is $75.00 per share, and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that should follow the split. What is the stock's expected price following the split?