Question 1

Metromat has the following equity accounts on its balance sheet:

The current market price of Metromat's shares is $16.If the firm declares a 15% stock dividend and a $0.15 per share cash dividend, what will be the impact on contributed capital in excess of par? Assume a marginal tax rate of 40%.

Accepted Answer

Increase = 2.4(0.15)($14) = $5.040 million

Question 2

Interim Systems has 1.5 million shares outstanding.This year Interim will have operating income (EBIT) of $18.2 million, interest expenses of $2.4 million, depreciation expenses of $3.1 million.What will the dividend per share be if Interim's dividend payout ratio is 40%? Assume a marginal tax rate of 40%.

Accepted Answer

DPS = [($18.2 - $2.4)(0.6)(0.4)]/1.5 = $2.528 or $2.53

Question 3

Kaneb Services, Inc.has just declared a 3 for 2 stock split.If the pre-split price of common stock was $42 a share, what will be the post-split price per share (assuming no other changes occur)?

Accepted Answer

Post-split price = 2($42)/3 = $28

Question 4

Badger Tool and Die Company has 100,000 shares outstanding and plans to pay $1.00 per share in dividends each quarter next year.Badger has a capital budget of $700,000 for next year and plans to maintain its present debt ratio of 0.30.If earnings are expected to be $7.20 per share, how much external equity must Badger raise?

Accepted Answer

Earnings - dividends = R.E. = $720,000 - $400,000 = $320,000
Equity needed = $700,000(0.7) = $490,000
External equity = $490,000 - $320,000 = $170,000

Question 5

Nova earned $7.20 per share and maintains a stable payout ratio of 60 percent.Nova has 1,000,000 shares outstanding and a capital budget of $5 million.If Nova maintains a debt ratio of 0.50, what were the dividends per share?

Accepted Answer

DPS = $7.20(0.6) = $4.32

Question 6

Cafe de Oro earns $4.25 per share and has a dividend payout ratio of 0.40.If Cafe de Oro has a capital budget of $200,000 and 70,000 shares outstanding, what are the annual dividends per share?

Accepted Answer

DPS = $4.25(0.4) = $1.70

Question 7

Cycle Out has 1,000,000 shares outstanding and currently has annual earnings per share of $5.20.If Cycle's stock price is $62.40, what would be the expected stock price if Cycle repurchases 50,000 shares?

Accepted Answer

New EPS = $5,200,000/950,000 = $5.4737
Current P/E = $62.40/$5.20 = 12 times
New stock price = $5.4737(12) = $65.68;or Price = $62.40/0.95 = $65.68

Question 8

The Altern Music Co.earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000.If Altern Music raises all of its funds internally and follows the "passive residual policy", what are the annual dividends per share?

Accepted Answer

Earnings = 70,000($4.25) = $297,500
DPS = ($297,500 - $200,000)/70,000 = $1.39

Question 9

Wrenn Corp.has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses of $3.7 million.What is Wrenn's operating income if the dividend per share is $0.80 and the dividend payout ratio is 35%? Assume a marginal tax rate of 40%.

Accepted Answer

Dividends = 5.6($0.80) = $4.48 (million)
EAT = $4.48/0.35 = $12.8 (million)
EBIT = $12.8/(1 - 0.40) + $4.4 = $25.733 (million)

Question 10

Kaneb Services, Inc.has just declared a 3 for 2 stock split.The company's pre-split common stockholders' equity was as follows:

If the pre-split price of common stock was $42, what will be the amount of retained earnings after the split?

Accepted Answer

In a stock split retained earnings do not change

Question 11

Excelsior Company's capital structure is as follows:

The current market price of the firm's common stock is $30.If the firm declares a 10% stock dividend, determine the balance in the contributed capital in excess of par and retained earnings accounts.

Accepted Answer

Number of new shares = 0.10(2,000,000) = 200,000
Amount transferred from R/E = 200,000 × $30 = $6,000,000
New R/E balance = $23,000,000 - $6,000,000 = $17,000,000
New C/S balance = $4,000,000 + 200,000 × $2 = $4,400,000
New Contributed capital in excess of par balance = $16,000,000 + ($6,000,000 - $400,000) =
$21,600,000
New Total C/S Equity = $43,000,000 (no change)

Question 12

WPI Inc.has the following current equity accounts on its balance sheet:

If WPI earned $3.20 per share this year, what is the maximum dividend per share that WPI may pay if the state capital impairment provisions are limited to the par value and the contributed capital in excess of par accounts?

Accepted Answer

DPS = $15,540,000/500,000 = $31.08

Question 13

Haulsee Inc.paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase in the quarterly dividend to $0.14.What is the effective rate of the dividend increase?

Accepted Answer

Percentage increase = [($0.14)(1.10) - 0.12]/0.12
= 0.283 or 28.3%

Question 14

If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of $6.8 million, what is Sulzer's dividend payout ratio, given that the dividend per share is $0.80? Assume a marginal tax rate of 40%.

Accepted Answer

EAT = ($42.4 - $6.8)(1 - 0.40) = $21.36
EPS = 21.36/10 = $2.136
Dividend payout ratio = $0.80/$2.136 = 0.3745

Question 15

Zimmer Corp.has just declared a 5 for 4 stock split.If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur)?

Accepted Answer

Price = 4(36)/5 = $28.80

Question 16

Omega Sports has the following equity accounts on its balance sheet:

The current market price of the firm's shares is $20.If the firm declares a 10 percent stock dividend and a cash dividend of $0.10 per share, the retained earning account would change to .

Accepted Answer

RE = $21,204,000 - 90,000($20) - 990,000($0.10)
= $19,305,000

Question 17

Leigh Fibers has 6 million shares outstanding.This year Leigh will have operating income (EBIT) of $36.4 million, interest expenses of $5.8 million, and depreciation expenses of $6.2 million.What will be Leigh's dividend per share if the company has a payout ratio of 30%? Assume a marginal tax rate of 40%.

Accepted Answer

EAT = ($36.4 - $5.8)(1 - 0.40) = $18.36 (million)
DPS = $18.36(0.30)/6 = $0.918

Question 18

Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50 respectively next year.Peterson currently has 5,000,000 shares of common stock outstanding.The company's capital budget for next year is projected to be $25,000,000.Peterson plans to maintain its present debt ratio (debt to total assets) at 40% next year.(Assume that Peterson's capital structure includes only common equity and debt and that these will be the only sources of funds to finance capital budgeting projects next year.) Determine how much external equity the company must raise to finance its capital budget.

Accepted Answer

R/E = ($4.50 - $2.50) × 5,000,000 shares = $10,000,000
Equity portion of capital budget = 0.60 × $25,000,000 = $15,000,000
External equity needed = $15,000,000 - $10,000,000 = $5,000,000

Question 19

The Barden Corporation has the following equity accounts on its balance sheet:

What is the maximum amount of dividends per share that may be paid by the Barden Corp.if the capital impairment provisions of state law are limited to the par value and the capital in excess of par accounts?

Accepted Answer

DPS = $153.6/3 = $51.20

Question 20

Zycad has operating earnings (EBIT) of $8.6 million and annual interest expenses are $1.5 million.Zycad wishes to maintain its annual dividend of $1.00 per share on the 1,900,000 shares outstanding.The firm has a bond issue outstanding that requires the retirement of $3 million (face value) of the issue each year through purchases of the bonds in the market.What is the maximum dividend per share that may be paid if the current market price of the bonds is $85? Assume the marginal tax rate is 40% and that earnings are the only source of funds that can be used to pay the dividend and retire the bonds.

Accepted Answer

Earnings available for dividends ($8.6 - $1.5)(0.6) - $3(0.85) = $1.71 million
DPS = $1.71/1.9 = $0.90

Quiz 15: Dividend Policy

Metromat has the following equity accounts on its balance sheet: The current market price of Metromat's shares is $16.If the firm declares a 15% stock dividend and a $0.15 per share cash dividend, what will be the impact on contributed capital in excess of par? Assume a marginal tax rate of 40%.

Kaneb Services, Inc.has just declared a 3 for 2 stock split.If the pre-split price of common stock was $42 a share, what will be the post-split price per share (assuming no other changes occur) ?

Nova earned $7.20 per share and maintains a stable payout ratio of 60 percent.Nova has 1,000,000 shares outstanding and a capital budget of $5 million.If Nova maintains a debt ratio of 0.50, what were the dividends per share?

Cafe de Oro earns $4.25 per share and has a dividend payout ratio of 0.40.If Cafe de Oro has a capital budget of $200,000 and 70,000 shares outstanding, what are the annual dividends per share?

Cycle Out has 1,000,000 shares outstanding and currently has annual earnings per share of $5.20.If Cycle's stock price is $62.40, what would be the expected stock price if Cycle repurchases 50,000 shares?

The Altern Music Co.earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000.If Altern Music raises all of its funds internally and follows the "passive residual policy", what are the annual dividends per share?

Wrenn Corp.has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses of $3.7 million.What is Wrenn's operating income if the dividend per share is $0.80 and the dividend payout ratio is 35%? Assume a marginal tax rate of 40%.

Kaneb Services, Inc.has just declared a 3 for 2 stock split.The company's pre-split common stockholders' equity was as follows: If the pre-split price of common stock was $42, what will be the amount of retained earnings after the split?

Excelsior Company's capital structure is as follows: The current market price of the firm's common stock is $30.If the firm declares a 10% stock dividend, determine the balance in the contributed capital in excess of par and retained earnings accounts.

WPI Inc.has the following current equity accounts on its balance sheet: If WPI earned $3.20 per share this year, what is the maximum dividend per share that WPI may pay if the state capital impairment provisions are limited to the par value and the contributed capital in excess of par accounts?

Haulsee Inc.paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase in the quarterly dividend to $0.14.What is the effective rate of the dividend increase?

If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of $6.8 million, what is Sulzer's dividend payout ratio, given that the dividend per share is $0.80? Assume a marginal tax rate of 40%.

Zimmer Corp.has just declared a 5 for 4 stock split.If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur) ?

Omega Sports has the following equity accounts on its balance sheet: The current market price of the firm's shares is $20.If the firm declares a 10 percent stock dividend and a cash dividend of $0.10 per share, the retained earning account would change to .

The Barden Corporation has the following equity accounts on its balance sheet: What is the maximum amount of dividends per share that may be paid by the Barden Corp.if the capital impairment provisions of state law are limited to the par value and the capital in excess of par accounts?