Question 1

Purvis Lawn Products has 18,000 shares of stock outstanding at a market price of $5.50 a share.What will the market price per share be if the company does a 1-for-4 reverse stock split?

Accepted Answer

Market price = $5.50 × 4/1 = $22

Question 2

The Olive Vase has 56,000 shares of stock outstanding with a par value of $1 per share and a market value of $11 a share.The company just announced a 3-for-4 reverse stock split.Currently,you own 500 shares of this stock.What will the total value of your shares be after the reverse stock split?

Accepted Answer

The total value of your shares will not change.Total value = 500(3/4) × $11(4/3) = $5,500

Question 3

City Center Pharmacy has 11,500 shares of stock outstanding with a par value of $1 per share and a market value of $12 a share.The company just announced a 3-for-7 reverse stock split.What will the market value per share be after the reverse stock split?

Accepted Answer

Market value per share = $12 × 7/3 = $28.00

Question 4

Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per share.Assume no market imperfections or tax effects exist.What will the new share price be if the firm declares a 40 percent stock dividend?

Accepted Answer

New price = $54 (1/1.40) = $38.57

Question 5

The Turtle Cave currently has 160,000 shares of stock outstanding that sell for $60 per share.Assume no market imperfections or tax effects exist.What will the new share price be if the firm declares a 10 percent stock dividend?

Accepted Answer

New price = $60 (1/1.10) = $54.55

Question 6

Explain the meaning of the dividend clientele effect and why it is important.

Accepted Answer

The answer of Explain the meaning of the dividend clientele...

Question 7

The Green Fiddle has declared a $5 per share dividend.Suppose capital gains are not taxed,but dividends are taxed at 15 percent.New IRS regulations require that taxes be withheld at the time the dividend is paid.Green Fiddle stock sells for $71.50 per share,and the stock is about to go ex-dividend.What will the ex-dividend price be?

Accepted Answer

Ex-dividend price = $71.50 - [$5 × (1 - 0.15)] = $67.25

Question 8

You own 1,500 shares of stock in Avondale Corporation.You will receive a $0.80 per share dividend in one year.In two years,Avondale will pay a liquidating dividend of $35 per share.The required return on Avondale stock is 16 percent.You only want $200 total in dividends in year one and accomplish this by using homemade dividends.What will your total dividend amount be in year two?

Accepted Answer

Dividends received in one year = 1,500 × $0.80 = $1,200Price of stock in one year = $35/1.16 = $30.1724Number of shares purchased = ($1,200 - $200)/$30.1724 = 33.142857 sharesDividend in year two = $35 × (1,500 + 33.142857) = $53,660

Question 9

You own 1,000 shares of stock in Avondale Corporation.You will receive an 80-cent per share dividend in one year.In two years,Avondale will pay a liquidating dividend of $40 per share.The required return on Avondale stock is 14 percent.What will your dividend income be this year if you use homemade dividends to create two equal annual dividend payments?

Accepted Answer

P₀ = ($0.80/1.14) + ($40/1.14²) = $31.48$31.48 = (D/1.14) + (D/1.14²); D = $19.117Dividend income = 1,000 × $19.117 = $19,117

Question 10

The balance sheet for Apple Pie Corp.is shown here in market value terms.There are 5,000 shares of stock outstanding.  The company has declared a dividend of $1.80 per share.The stock goes ex-dividend tomorrow.Ignore any tax effects.What will the price of the stock be tomorrow?

Accepted Answer

Tomorrow's stock price = ($207,000/5,000) - $1.80 = $39.60

Question 11

Built Rite Corp.is evaluating an extra dividend versus a share repurchase.In either case,$5,500 would be spent.Current earnings are $0.80 per share,and the stock currently sells for $33 per share.There are 250 shares outstanding.Ignore taxes and other imperfections.You own one share of stock in this company.If the company issues the dividend,your total investment will be worth ____ as compared to ____ if the company opts for a share repurchase.

Accepted Answer

Dividend per share = $5,500/250 = $22Ex-dividend stock price = $33 - $22 = $11Shareholder value with dividend option = $22 + $11 = $33Shares repurchased = $5,500/$33 = 166.6667Shareholder value with repurchase = $33Shareholder value if shares held = $33

Question 12

The balance sheet for Apple Pie Corp.is shown here in market value terms.There are 5,000 shares of stock outstanding.  The company has announced that it is going to repurchase $4,350 worth of stock.What will the price of the stock be after this repurchase?

Accepted Answer

Current price per share = $175,000/5,000 = $35Number of shares repurchased = $4,350/$35 = 124.29New shares outstanding = 5,000 - 124.29 = 4,875.71New share price = ($175,000 - $4,350)/4,875.71 = $35

Question 13

You are the CFO of a non-dividend paying firm that currently has excess cash reserves.You are preparing for an internal management meeting where dividends are on the agenda.You know that the CEO favors the commencement of a dividend program.You,however,oppose any dividend plan at this time.Write a good argument that you can use in the meeting to support your position.

Accepted Answer

The answer of You are the CFO of a non-dividend...

Question 14

The owners' equity accounts for Blueswell Industries are shown here:  If Blueswell Industries declares a 1-for-5 reverse stock split,there will be ____ shares outstanding at a par value of _____ per share.

Accepted Answer

New shares = 9,000 × 1/5 = 1,800 sharesNew par value = $1 × 5/1 = $5

Question 15

The common stock of Checkers,Inc.is selling for $56 a share and the par value per share is $1.Currently,the firm has a total market value of $812,000.How many shares of stock will be outstanding if the firm does a 3-for-2 stock split?

Accepted Answer

Number of shares = ($812,000/$56) × 3/2 = 21,750 shares

Question 16

The market value balance sheet for Inbox Manufacturing is shown here.Inbox has declared a 15 percent stock dividend.The stock goes ex-dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend).There are 13,000 shares outstanding.What is the ex-dividend stock price?

Accepted Answer

New price = $376,000/(13,000 × 1.15) = $25.15

Question 17

Jean's Warehouse has 16,000 shares of stock outstanding.The current market value of the firm is $768,000.The company has retained earnings of $130,000,paid in surplus of $321,000,and a common stock account value of 16,000.The company is planning a 5-for-3 stock split.What will the retained earnings account value be after the split?

Accepted Answer

The retained earnings will remain at $130,000 as a stock split does not affect the balance.

Question 18

The common stock of Gillen Entertainment is selling for $65 a share.The par value per share is $1.Currently,the firm has a total market value of $936,000.How many shares of stock will be outstanding if the firm does a 5-for-2 stock split?

Accepted Answer

Number of shares = ($936,000/$65) × 5/2 = 36,000 shares

Question 19

The Green Florist has 28,000 shares of stock outstanding with a par value of $1 per share and a market value of $7 a share.The company just announced a 2-for-5 reverse stock split.Currently,you own 300 shares of this stock.How many shares will you own after the reverse stock split?

Accepted Answer

Number of shares = 300 × 2/5 = 120 shares

Question 20

East Coast Marina has 220,000 shares of stock outstanding.The current market value of the firm is $18.92 million.The company has retained earnings of $3.8 million,paid in surplus of $6.7 million,and a common stock account value of $220,000.The company is planning a 3-for-2 stock split.What will the market price per share be after the split?

Accepted Answer

Market price per share = ($18.92m/220,000 shares) × 2/3 = $57.33

Quiz 17: Dividends and Payout Policy