BUSI 320 Homework 8 Stocks and Dividend Policy Assignment solutions complete answers

BUSI 320 Homework 8 Stocks and Dividend Policy Assignment solutions complete answers

 

b. If the firm simply uses a payout ratio of 50 percent of net income, how much in total cash dividends will be paid? (Enter your answer in millions and round your answer to 1 decimal place.)

  

c. If the firm pays a 10 percent stock dividend in years 2 through 5, and also pays a cash dividend of $3.40 per share for each of the five years, how much in total dividends will be paid?

 

 d. Assume the payout ratio in each year is to be 20 percent of the net income and the firm will pay a 10 percent stock dividend in years 2 through 5, how much will dividends per share for each year be? (Assume the cash dividend is paid after the stock dividend.) (Round your answers to 2 decimal places.)

 

The Hastings Corporation has 2 million shares outstanding. (The following questions are separate from each other).

 

The Carlton Corporation has $6 million in earnings after taxes and 3 million shares outstanding. The stock trades at a P/E of 20. The firm has $3 million in excess cash.

 

Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows:

 

The company’s stock is selling for $30 per share. The company had total earnings of $5,000,000 with 2,000,000 shares outstanding and earnings per share were $2.50. The firm has a P/E ratio of 12.

 

a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts. (Do not round intermediate calculations. Input your answers in dollars, not millions (e.g. $1,230,000).)

 

The company’s stock is selling for $40 per share. The company had total earnings of $10,000,000 during the year. With 2,500,000 shares outstanding, earnings per share were $4. The firm has a P/E ratio of 10.

 

Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $25 to $50 per share. The firm’s current statement of stockholders’ equity is as follows:

 

D0 is currently $2.90, Ke is 9 percent, and g is 5 percent.
Under Plan A, D0 would be immediately increased to $3.20 and Ke and g will remain unchanged.
Under Plan B, D0 will remain at $2.90 but g will go up to 6 percent and Ke will remain unchanged.

 

a. Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0 × (1 + g) or $3.20 (1.05). Ke will equal 9 percent, and g will equal 5 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

 

The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $5 per share.

 

The firm intends to first declare a 10 percent stock dividend and then pay a 20-cent cash dividend (which also causes a reduction of retained earnings).

 

The stock of Pills Berry Company is currently selling at $70 per share. The firm pays a dividend of $2.60 per share.

 

A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 39 percent and will eventually reach 58 percent during the maturity stage (IV).

 

Planetary Travel Co. has $174,000,000 in stockholders’ equity. Common stock is $50,000,000 and the balance is retained earnings. The firm has $275,000,000 in total assets and 6 percent of this value is in cash. Earnings for the year are $20,000,000 and are included in retained earnings.

 

Polycom Systems earned $571 million last year and paid out 28 percent of earnings in dividends.

 

Ralston Gourmet Foods Inc. earned $255 million last year and retained $130 million.

 

Mr. and Mrs. Anderson own two shares of Magic Tricks Corporation's common stock. The market value of the stock is $62. The Andersons also have $50 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $50 for each two shares currently owned (based on two rights). (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

 

Rust Pipe Co. was established in 1994. Four years later the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders' stock and is entitled to fourteen votes per share. The normally traded common stock, designated as Class B, is entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering purchasing shares in Rust Pipe Co. While he knew the existence of founders’ shares were not often present in other companies, he decided to buy the shares anyway because of a new technology Rust Pipe had developed to improve the flow of liquids through pipes.

 

Of the 2,000,000 total shares currently outstanding, the original founder's family owns 52,925 shares.

 

Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 12 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 41,001 shares. Ms. Ramsey and her friends on the board control 51,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 24,998 shares. The company uses cumulative voting.

 

Mr. Meyers wishes to know how many shares are necessary to elect 6 directors out of 11 directors up for election in the Austin Power Company. There are 86,000 shares outstanding. (Do not round intermediate calculations.)

 

Katie Homes and Garden Co. has 14,900,000 shares outstanding. The stock is currently selling at $84 per share. If an unfriendly outside group acquired 25 percent of the shares, existing stockholders will be able to buy new shares at 30 percent below the currently existing stock price.

 

Question 1
Katie Homes and Garden Co. has 14,700,000 shares outstanding. The stock is currently selling at $80 per share. If an unfriendly outside group acquired 15 percent of the shares, existing stockholders will be able to buy new shares at 20 percent below the currently existing stock price.
 

a. How many shares must the unfriendly outside group acquire for the poison pill to go into effect? (Do not round intermediate calculations.)

 

b. What will be the new purchase price for the existing stockholders? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question 2
Mr. Meyers wishes to know how many shares are necessary to elect 2 directors out of 9 directors up for election in the Austin Power Company. There are 94,000 shares outstanding. (Do not round intermediate calculations.)
 

Question 3
Betsy Ross owns 987 shares in the Hanson Fabrics Company. There are 13 directors to be elected, and 43,500 shares outstanding. The firm has adopted cumulative voting.
 

a. How many total votes can be cast? (Do not round intermediate calculations and round your answer to the nearest whole number.)

 

b. How many votes does Betsy control? (Do not round intermediate calculations and round your answer to the nearest whole number.)

 

c. What percentage of the total votes does she control? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 4
Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 13 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 35,001 shares. Ms. Ramsey and her friends on the board control 55,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 33,998 shares. The company uses cumulative voting.
 

a. How many directors can Mr. Clark be sure of electing? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)

 

b. How many directors can Ms. Ramsey and her friends be sure of electing? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)

 

c-1. How many directors could Mr. Clark elect if he obtains all the proxies for the uncommitted votes? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)

 

c-2. Will he control the board?

 

d. If nine directors were to be elected, and Ms. Ramsey and her friends had 63,001 shares and Mr. Clark had 43,001 shares plus half the uncommitted votes, how many directors could Mr. Clark elect? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)

 

Question 5
Rust Pipe Co. was established in 1994. Four years later the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders' stock and is entitled to eight votes per share. The normally traded common stock, designated as Class B, is entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering purchasing shares in Rust Pipe Co. While he knew the existence of founders’ shares were not often present in other companies, he decided to buy the shares anyway because of a new technology Rust Pipe had developed to improve the flow of liquids through pipes.
 

Of the 1,400,000 total shares currently outstanding, the original founder's family owns 51,725 shares.

 

What is the percentage of the founder's family votes to Class B votes? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 6
Mr. and Mrs. Anderson own five shares of Magic Tricks Corporation's common stock. The market value of the stock is $78. The Andersons also have $66 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $66 for each five shares currently owned (based on five rights). (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
 

a. What is the value of a right?

 

b. What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in this question represents stock plus cash.)

 

c-1. Compute the diluted value (ex-rights) per share.

 

c-2. If the Andersons participate in the rights offering, what will be the value of their portfolio, based on the diluted value (ex-rights) of the stock?

 

d. If they sell their two rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?

 

Question 7
Walker Machine Tools has 7.4 million shares of common stock outstanding. The current market price of Walker common stock is $90 per share rights-on. The company’s net income this year is $27.00 million. A rights offering has been announced in which 740,000 new shares will be sold at $84.50 per share. The subscription price plus twelve rights is needed to buy one of the new shares.
 

a. What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering? (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

b. What would the earnings per share be immediately after the rights offering? What would the price-earnings ratio be immediately after the rights offering? (Assume there is no change in the market value of the stock, except for the change when the stock begins trading ex-rights.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

Question 8
Enterprise Storage Company has 650,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $5.30. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

a. How much in total dollars is the company behind in its payments? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

 

b. The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit.

 

The common stock will pay the following dividends over the next four years:

 

The company anticipates earnings per share after four years will be $4.30 with a P/E ratio of 19.


 

The common stock will be valued as the present value of future dividends plus the present value of the future stock price after four years. The discount rate used by the investment banker is 10 percent.

 

Compute the value of the common stock. (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. How many shares of common stock must be issued at the value computed in part b to eliminate the deficit (arrearage) computed in part a? (Do not round intermediate calculations and round your answer to the nearest whole share.)

 

Question 9
Ralston Gourmet Foods Inc. earned $155 million last year and retained $135 million.
 

What is the payout ratio? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 10
Polycom Systems earned $551 million last year and paid out 22 percent of earnings in dividends.
 

a. By how much did the company’s retained earnings increase? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

 

b. With 100 million shares outstanding and a stock price of $145, what was the dividend yield? (Hint: First compute dividends per share.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 11
The following companies have different financial statistics.
 

a. What dividend policy would you recommend for Turtle Co.?

 

b. What dividend policy would you recommend for Hare Corp.?

 

Question 12
Planetary Travel Co. has $158,000,000 in stockholders’ equity. Common stock is $50,000,000 and the balance is retained earnings. The firm has $320,000,000 in total assets and 4 percent of this value is in cash. Earnings for the year are $21,000,000 and are included in retained earnings.
 

a. What is the legal limit on current dividends? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

 

b. What is the practical limit based on liquidity? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

 

c. If the company pays out the amount in part b, what is the dividend payout ratio? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 13
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 10 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 31 percent and eventually reach 52 percent during the maturity stage (IV).
 

a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)

 

b. Assume in Stage IV that an investor owns 330 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

 

Question 14
Squash Delight Inc. has the following balance sheet:
 

The firm’s stock sells for $9 a share.

 

a. Show the effect on the capital accounts of a two-for-one stock split. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

 

b. Show the effect on the capital accounts of a 10 percent stock dividend. Part b is separate from part a. In part b do not assume the stock split has taken place. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

 

c. Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?

 

Question 15
In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two plans. The values represent dividends per share. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

a. How much in total dividends per share will be paid under each plan over five years? (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

b-1. Mr. Bright, the vice president of finance, suggests that stockholders often prefer a stable dividend policy to a highly variable one. He will assume that stockholders apply a lower discount rate to dividends that are stable. The discount rate to be used for Plan A is 8 percent; the discount rate for Plan B is 12 percent. Compute the present value of future dividends. (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

b-2. Which plan will provide the higher present value for the future dividends?

 

Question 16
The stock of Pills Berry Company is currently selling at $95 per share. The firm pays a dividend of $3.00 per share.
 

a. What is the annual dividend yield? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. If the firm has a payout rate of 50 percent, what is the firm’s P/E ratio? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

Question 17
The shares of the Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 20. Fifty percent of earnings is paid out in dividends.
 

What is the firm’s dividend yield? (Do not round your intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 18
The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $7 per share.
 

The firm intends to first declare a 15 percent stock dividend and then pay a 20-cent cash dividend (which also causes a reduction of retained earnings).

 

Show the capital section of the balance sheet after the first transaction and then after the second transaction. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

 

Question 19
Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year. Assume its balance sheet is as follows:
 

a-1. From a legal perspective, what is the maximum amount of dividends per share the firm could pay? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

a-2. Is this realistic?

 

b. In terms of cash availability, what is the maximum amount of dividends per share the firm could pay? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. Assume the firm earned an 12 percent return on stockholders’ equity last year. If the board wishes to pay out 70 percent of earnings in the form of dividends, how much will dividends per share be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

Question 20
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.
 

D0 is currently $2.60, Ke is 8 percent, and g is 4 percent.

 

Under Plan A, D0 would be immediately increased to $3.00 and Ke and g will remain unchanged.

 

Under Plan B, D0 will remain at $2.60 but g will go up to 5 percent and Ke will remain unchanged.

 

a. Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0 × (1 + g) or $3.00 (1.04). Ke will equal 8 percent, and g will equal 4 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

 

b. Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0 × (1 + g) or $2.60 (1.05). Ke will be equal to 8 percent, and g will be equal to 5 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

 

c. Which plan will produce the higher value?

 

Question 21
Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $45 to $70 per share. The firm’s current statement of stockholders’ equity is as follows:
 

a-1. How many shares would be outstanding after a two-for-one stock split? (Do not round intermediate calculations. Input your answer in millions (e.g., $1.23 million should be entered as "1.23").)

 

a-2. What would be its par value? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

b-1. How many shares would be outstanding after a three-for-one stock split? (Do not round intermediate calculations. Input your answer in millions (e.g., $1.23 million should be entered as "1.23").)

 

b-2 What would be its par value? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. Assume that Wilson earned $10 million. What would its earnings per share be before and after the two-for-one stock split? After the three-for-one stock split? (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

d. What would be the price per share after the two-for-one stock split? After the three-for-one stock split? (Assume that the price-earnings ratio of 7.00 stays the same.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

Question 22
Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend.
 

*The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times (Market price − Par value).

 

The company’s stock is selling for $10 per share. The company had total earnings of $2,400,000 during the year. With 2,400,000 shares outstanding, earnings per share were $1. The firm has a P/E ratio of 10.

 

a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts. (Do not round intermediate calculations. Input your answers in dollars, not millions (e.g. $1,230,000).)

 

b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

c. How many shares would an investor end up with if he or she originally had 100 shares? (Do not round intermediate calculations and round your answer to the nearest whole share.)

 

d. What is the investor's total investment worth before and after the stock dividend if the P/E ratio remains constant? (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

 

Question 23
Health Systems Inc. is considering a 15 percent stock dividend. The capital accounts are as follows:
 

*The increase in capital in excess of par as a result of a stock dividend is equal to the shares created times (Market price – Par value).

 

The company’s stock is selling for $28 per share. The company had total earnings of $7,000,000 with 3,500,000 shares outstanding and earnings per share were $2.00. The firm has a P/E ratio of 14.  

 

a. What adjustments would have to be made to the capital accounts for a 15 percent stock dividend? Show the new capital accounts. (Do not round intermediate calculations. Input your answers in dollars, not millions (e.g. $1,230,000).)

 

b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.) (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

c. How many shares would an investor have if he or she originally had 100? (Do not round intermediate calculations and round your answer to the nearest whole share.)

 

d. What is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant? (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

 

e. Assume Mr. Heart, the president of Health Systems, wishes to benefit stockholders by keeping the cash dividend at a previous level of $1.15 in spite of the fact that the stockholders now have 15 percent more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $28.

 

What is an investor’s total investment worth after the stock dividend if he/she had 100 shares before the stock dividend?

 

f. Under the scenario described in part e, is the investor better off?

 

g. As a final question, what is the dividend yield on this stock under the scenario described in part e? (Input your answer as a percent rounded to 2 decimal places.)

 

Question 24
Worst Buy Company has had a lot of complaints from customers of late, and its stock price is now only $4 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Dean Smith owns 108 shares.
 

a. How many shares will he own after the reverse stock split? (Do not round intermediate calculations and round your answer to the nearest whole number.)

 

b. What is the anticipated price of the stock after the reverse stock split? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. Because investors often have a negative reaction to a revere stock split, assume the stock only goes up to 80 percent of the value computed in part b. What will the stock’s price be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

d. How has the total value of Dean Smith’s holdings changed from before the reverse stock split to after the reverse stock split (based on the stock value computed in part c)? To get the total value before and after the split, multiply the shares held times the stock price. (Input the amount as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

Question 25
The Carlton Corporation has $3 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E of 5. The firm has $2 million in excess cash.
 

a. Compute the current price of the stock. (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

b. If the $2 million is used to pay dividends, how much will dividends per share be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. If the $2 million is used to repurchase shares in the market at a price of $17 per share, how many shares will be acquired? (Do not round intermediate calculations and round your answer to the nearest whole share.)

 

d. What will the new earnings per share be? (Use the rounded number of shares computed in part c but do not round any other intermediate calculations. Round your answer to 2 decimal places.)

 

e-1. If the P/E ratio remains constant, what will the price of the securities be? (Use the rounded answer from part d and round your answer to the nearest whole dollar.)

 

e-2. By how much, in terms of dollars, did the repurchase increase the stock price? (Use the rounded whole dollar answer from part e-1. A negative value should be indicated with a minus sign. Round your answer to the nearest whole dollar.)

 

f. Has the stockholders' total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividend?

 

Question 26
The Hastings Sugar Corporation has the following pattern of net income each year, and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of dividends.
 

The Hastings Corporation has 3 million shares outstanding (The following questions are separate from each other).    

 

a. If the marginal principle of retained earnings is applied, how much in total cash dividends will be paid over the five years? (Enter your answer in millions.)

 

b. If the firm simply uses a payout ratio of 20 percent of net income, how much in total cash dividends will be paid? (Enter your answer in millions and round your answer to 1 decimal place.)

 

c. If the firm pays a 20 percent stock dividend in years 2 through 5, and also pays a cash dividend of $3.40 per share for each of the five years, how much in total dividends will be paid?

 

d. Assume the payout ratio in each year is to be 20 percent of net income and the firm will pay a 10 percent stock dividend in years 2 through 5. How much will dividends per share for each year be? (Assume cash dividend is paid after the stock dividend). (Round your answers to 2 decimal places.)