Finance Chapter 19

Murphy's, Inc., has 32,050 shares of stock outstanding with a par value of $1 per share. The market value is $12 per share. The balance sheet shows $88,050 in the capital in excess of par account, $32,050 in the common stock account, and $149,950 in the retained earnings account. The firm just announced a stock dividend of 12 percent. What will the market price per share be after the dividend

$10.71 Explanation: Data provided as the question below:- Stock outstanding per share = 32,050 Market value per share = $12 The computation of market per share be after the dividend is shown below:- Where for computing the $1.12 = $1 + 0.12 = $1.12 = (32,050 × $12) ÷ (32,050 × $1.12) = $384,600 ÷ $35,896 = $10.71 Therefore, the market price per share is $10.71

Assume personal tax rates are lower than corporate tax rates. From a tax-paying shareholder point of view, how should a firm spend its excess cash once it has funded all positive net present value projects?

Repurchase shares

The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the:

clientele effect.

The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date.

declaration

A stock split:

does not affect the total book value of any of the equity accounts.

The ability of shareholders to undo the dividend policy of a firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is referred to as:

homemade dividends.

Bowzer Co. has just received $2.7 million from the sale of one of its divisions. The company has 375,000 shares outstanding that sell for $84.13 per share. If the company issues the entire proceeds from the sale as a special dividend, what will the ex-dividend stock price be

$76.93 per share Explanation: The computation of ex-dividend stock price is shown below:- Sale of division = $2,7,00,000 Outstanding shares = 375,000 Dividend per share = Sale of division ÷ Outstanding shares = $2,7,00,000 ÷ 375,000 = $7.2 Stock price after dividend = Sold shares - Dividend per share = $84.13 - $7.2 = $76.93 per share Therefore for computing the stock price per dividend we simply subtract dividend per share from sold shares.

Heidi owns 980 shares of Boyd Enterprises, which is priced at $67.54 per share. The company plans a 4-for-1 stock split. How many shares will Heidi own and what will the share price be after the stock split?

3,920; $16.89

A firm has a market value equal to its book value. Currently, the firm has excess cash of $7,900 and other assets of $17,100. Equity is worth $25,000. The firm has 450 shares of stock outstanding and net income of $2,700. What will the stock price per share be if the firm pays out its excess cash as a cash dividend?

?

The Cincinnati Chili Kitchen has just announced the repurchase of $165,000 of its stock. The company has 47,000 shares outstanding and earnings per share of $3.45. The company stock is currently selling for $77.13 per share. What is the price-earnings ratio after the repurchase?

?

The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 5 percent. Suppose the capital gains tax rate is zero, whereas the dividend tax rate is 30 percent. Gecko has an expected earnings growth rate of 17 percent annually and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock?

Assuming no capital gains tax, the aftertax return for the Gordon Company is the capital gains growth rate, plus the dividend yield times one minus the tax rate. Using the constant growth dividend model, we get: Aftertax return = g + D(1 - t) = .17 Solving for g, we get: .17 = g + .05(1 - .30) g = .1350 The equivalent pretax return for Gordon Company is: Pretax return = g + D Pretax return = .1350 + .05 Pretax return = .1850, or 18.50%

National Business Machine Co. (NBM) has $4.1 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment income will be paid out as a special dividend at the end of three years. In this case, the firm can invest in either Treasury bills yielding 1.9 percent or a 4.3 percent preferred stock. IRS regulations allow the company to exclude from taxable income 50 percent of the dividends received from investing in another company's stock. Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasury bills with the same yield or in preferred stock. The corporate tax rate is 21 percent. Assume the investor has a 28 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 10 percent on common stock dividends. Suppose the company reinvests the $4.1 million and pays a dividend in three years. a-1. What is the total aftertax cash flow to shareholders if the company invests in T-bills? a-2. What is the total aftertax cash flow to shareholders if the company invests in preferred stock? Suppose instead that the company pays a $4.1 million dividend now and the shareholder reinvests the dividend for three years. b-1. What is the total aftertax cash flow to shareholders if the shareholder invests in T-bills? b-2. What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock?

Since the $4,100,000 cash is after corporate tax, the full amount will be invested. So, the value of each alternative is: Alternative 1: The firm invests in T-bills or in preferred stock and then pays out a special dividend in 3 years. If the firm invests in T-Bills: If the firm invests in T-bills, the aftertax yield of the T-bills will be: Aftertax corporate yield = .019(1 - .21) Aftertax corporate yield = .0150, or 1.50% So, the future value of the corporate investment in T-bills will be: FV of investment in T-bills = $4,100,000(1 + .0150)3 FV of investment in T-bills = $4,287,408.06 Since the future value will be paid to shareholders as a dividend, the aftertax cash flow will be: Aftertax cash flow to shareholders = $4,287,408.06(1 - .10) Aftertax cash flow to shareholders = $3,858,667.25 If the firm invests in preferred stock: If the firm invests in preferred stock, the assumption would be that the dividends received will be reinvested in the same preferred stock. The preferred stock will pay a dividend of: Preferred dividend = .043($4,100,000) Preferred dividend = $176,300 Since 50 percent of the dividends are excluded from tax: Taxable preferred dividends = (1 - .50)($176,300) Taxable preferred dividends = $88,150 And the taxes the company must pay on the preferred dividends will be: Taxes on preferred dividends = .21($88,150) Taxes on preferred dividends = $18,512 So, the aftertax dividend for the corporation will be: Aftertax corporate dividend = $176,300 - 18,512 Aftertax corporate dividend = $157,789 This means the aftertax corporate dividend yield is: Aftertax corporate dividend yield = $157,789/$4,100,000 Aftertax corporate dividend yield = .0385, or 3.85% The future value of the company's investment in preferred stock will be: FV of investment in preferred stock = $4,100,000(1 + .0385)3 FV of investment in preferred stock = $4,591,816.67 Since the future value will be paid to shareholders as a dividend, the aftertax cash flow will be: Aftertax cash flow to shareholders = $4,591,816.67(1 - .10) Aftertax cash flow to shareholders = $4,132,635.00 Alternative 2: The firm pays the dividend now and individuals invest on their own. The aftertax cash received by shareholders now will be: Aftertax cash received today = $4,100,000(1 - .10) Aftertax cash received today = $3,690,000 The individuals invest in Treasury bills: If the shareholders invest the current aftertax dividends in Treasury bills, the aftertax individual yield will be: Aftertax individual yield on T-bills = .019(1 - .28) Aftertax individual yield on T-bills = .0137, or 1.37% So, the future value of the individual investment in Treasury bills will be: FV of investment in T-bills = $3,690,000(1 + .0137)3 FV of investment in T-bills = $3,843,518.71 The individuals invest in preferred stock: If the individual invests in preferred stock, the assumption would be that the dividends received will be reinvested in the same preferred stock. The preferred stock will pay a dividend of: Preferred dividend = .043($3,690,000) Preferred dividend = $158,670 And the taxes on the preferred dividends will be: Taxes on preferred dividends = .28($158,670) Taxes on preferred dividends = $44,428 So, the aftertax preferred dividend will be: Aftertax preferred dividend = $158,670 - 44,428 Aftertax preferred dividend = $114,242 This means the aftertax individual dividend yield is: Aftertax corporate dividend yield = $114,242/$3,690,000 Aftertax corporate dividend yield = .0310, or 3.10% The future value of the individual investment in preferred stock will be: FV of investment in preferred stock = $3,690,000(1 + .0310)^3 FV of investment in preferred stock = $4,043,447.54 The aftertax cash flow for the shareholders is maximized when the firm invests the cash in the preferred stocks and pays a special dividend later.

Samuel, Inc., has declared a $5.60 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld when the dividend is paid. The company's stock sells for $94.10 per share and is about to go ex-dividend. What do you think the ex-dividend price will be?

The aftertax dividend is the pretax dividend times one minus the tax rate, so: Aftertax dividend = $5.60(1 - .15) Aftertax dividend = $4.76 The stock price should drop by the aftertax dividend amount, or: Ex-dividend price = $94.10 - 4.76 Ex-dividend price = $89.34

Wydex stock is currently trading at $82 a share. The firm feels that its primary clientele can afford to spend between $2,000 and $2,500 to purchase a round lot of 100 shares. The firm should consider a:

The company should consider a stock split which would enable it to reduce the price of its stock but without changing total shareholder value. With a stock split, the companies stock would be divided into smaller stocks that would have a lower price but when all these are added up, the total shareholder value would not change. Right now the stock is trading at $82 per share. If they could do a stock split such that each stock is between $20 and $25 then people would be able to spend between $2,000 and $2,500 to purchase a round lot of 100 shares.

The company with the common equity accounts shown here has declared a 5-for-1 stock split when the market value of its stock is $31 per share. The firm's 80 cent per share cash dividend on the new (postsplit) shares represents an increase of 20 percent over last year's dividend on the presplit stock. Common stock ($1 par value)$465,000 Capital surplus 862,000 Retained earnings 3,880,800 Total owner's equity$5,207,800 What is the new par value per share? What was last year's dividend per share?

The only equity account that will be affected is the par value of the stock. The par value will change by the ratio of old shares to new shares, so: New par value = $1(1/5) New par value = $.20 per share The total dividends paid this year will be the dividend amount times the number of shares outstanding. The company had 465,000 shares outstanding before the split. We must remember to adjust the shares outstanding for the stock split, so: Total dividends paid this year = $.80(465,000 shares)(5/1 split) Total dividends paid this year = $1,860,000 The dividends increased by 20 percent, so the total dividends paid last year were: Last year's dividends = $1,860,000/1.20 Last year's dividends = $1,550,000.00 And to find the dividends per share, we divide this amount by the shares outstanding last year. Doing so, we get: Dividends per share last year = $1,550,000.00/465,000 shares Dividends per share last year = $3.33

You own 1,800 shares of stock in Avondale Corporation. You will receive a dividend of $1.60 per share in one year. In two years, the company will pay a liquidating dividend of $66 per share. The required return on the company's stock is 12 percent. Suppose you want only $1,200 total in dividends the first year. What will your homemade dividend be in two years?

The price of the stock in one year will be: P1 = $66/1.12 P1 = $58.93 If you only want $1,200 in Year 1, you will buy: Shares purchased in Year 1 = ($2,880 - 1,200)/$58.93 Shares purchased in Year 1 = 28.51 shares at Year 1. Your dividend payment in Year 2 will be: Year 2 dividend = (1,800 + 28.51)($66) Year 2 dividend = $120,682 Note that the present value of each cash flow stream is the same. Below we show this by finding the present values as: PV = $1,200/1.12 + $120,682/1.12^2 PV = $97,278.06 PV = 1,800($1.60)/1.12 + 1,800($66)/1.12^2 PV = $97,278.06

You own 1,100 shares of stock in Avondale Corporation. You will receive a dividend of $1.80 per share in one year. In two years, the company will pay a liquidating dividend of $45 per share. The required return on the company's stock is 20 percent. a. Ignoring taxes, what is the current share price of your stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. If you would rather have equal dividends in each of the next two years, how many shares would you sell in one year? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. What would your cash flow be for each year for the next two years if you create equal homemade dividends? Hint: Dividends will be in the form of an annuity.

The price of the stock today is the PV of the dividends, so: P0 = $1.80/1.20 + $45/1.20^2 P0 = $32.75 To find the equal two year dividends with the same present value as the price of the stock, we set up the following equation and solve for the dividend (Note: The dividend is a two-year annuity, so we could solve with the annuity factor as well): $32.75 = D/1.20 + D/1.20^2 D = $21.44 We now know the cash flow per share we want each of the next two years. We can find the price of stock in one year, which will be: P1 = $45/1.20 P1 = $37.50 Since you own 1,100 shares, in one year you want: Cash flow in Year 1 = 1,100($21.44) Cash flow in Year 1 = $23,580 But you'll only get: Dividends received in one year = 1,100($1.80) Dividends received in one year = $1,980 Thus, in one year you will need to sell additional shares in order to increase your cash flow. The number of shares to sell in one year is: Shares to sell in one year = ($23,580 - 1,980)/$37.50 Shares to sell in one year = 576 shares At Year 2, your cash flow will be the dividend payment times the number of shares you still own, so the Year 2 cash flow is: Year 2 cash flow = $45(1,100 - 576) Year 2 cash flow = $23,580

The owners' equity accounts for Octagon International are shown here: Common stock ($.50 par value)$27,500 Capital surplus 305,000 Retained earnings 678,120 Total owners' equity$1,010,620 a-1. If the company's stock currently sells for $30 per share and a 15 percent stock dividend is declared, how many new shares will be distributed? a-2. Show the new equity account balances after the stock dividend is paid. (Do not round intermediate calculations.) b-1. If the company declared a 25 percent stock dividend, how many new shares will be distributed? b-2. Show the new equity account balances after the stock dividend is paid.

The shares outstanding increases by 15 percent, so: New shares outstanding = 55,000(1.15) New shares outstanding = 63,250 New shares issued = 63,250 - 55,000 New shares issued = 8,250 Since the par value of the new shares is $.50, the capital surplus per share is $29.50. The total capital surplus is therefore: Capital surplus on new shares = 8,250($29.50) Capital surplus on new shares = $243,375 Common stock = ($.50 par value)(63,250) Common stock = $31,625 b. The shares outstanding increases by 25 percent, so: New shares outstanding = 55,000(1.25) New shares outstanding = 68,750 New shares issued = 68,750 - 55,000 New shares issued = 13,750 Since the par value of the new shares is $.50, the capital surplus per share is $29.50. The total capital surplus is therefore: Capital surplus on new shares = 13,750($29.50) Capital surplus on new shares = $405,625 Common stock = ($.50 par value)(68,750) Common stock = $34,375

The balance sheet for Fourth Corp. is shown here in market value terms. There are 5,000 shares of stock outstanding. Market Value Balance Sheet Cash$45,100 Equity$495,100 Fixed assets 450,000 Total$495,100 Total$495,100 Instead of a dividend of $1.40 per share, the company has announced a share repurchase of $7,000 worth of stock. How many shares will be outstanding after the repurchase? What will the price per share be after the repurchase?

The stock price is the total market value of equity divided by the shares outstanding, so: P0 = $495,100 equity/5,000 shares P0 = $99.02 per share Repurchasing the shares will reduce shareholders' equity by $7,000. The shares repurchased will be the total purchase amount divided by the stock price, so: Shares repurchased = $7,000/$99.02 Shares repurchased = 70.69 And the new shares outstanding will be: New shares outstanding = 5,000 - 70.69 New shares outstanding = 4,929.31 After repurchase, the new stock price is: New stock price = ($495,100 - 7,000)/4,929.31 shares New stock price = $99.02 The repurchase is effectively the same as the cash dividend because you either hold a share worth $99.02, or a share worth $97.62 and $1.40 in cash. Therefore, if you participate in the repurchase according to the dividend payout percentage, you are unaffected.

The balance sheet for Fourth Corp. is shown here in market value terms. There are 8,000 shares of stock outstanding. Market Value Balance Sheet Cash$45,600 Equity$545,600 Fixed assets 500,000 Total$545,600 Total$545,600 The company has declared a dividend of $1.90 per share. The stock goes ex-dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? Ignoring any tax effects, what will it sell for tomorrow? Ignoring any tax effects, what will the balance sheet look like after the dividends are paid?

The stock price is the total market value of equity divided by the shares outstanding, so: P0 = $545,600 equity/8,000 shares P0 = $68.20 per share Ignoring tax effects, the stock price will drop by the amount of the dividend, so: PX = $68.20 - 1.90 PX = $66.30 The total dividends paid will be: Total dividends paid = $1.90 per share(8,000 shares) Total dividends paid = $15,200 The equity and cash accounts will both decline by $15,200.

The market value balance sheet for Oracle Manufacturing is shown here. The company has declared a stock dividend of 20 percent. The stock goes ex-dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). Market Value Balance Sheet Cash$88,000 Debt$147,000 Fixed assets 720,000 Equity 661,000 Total$808,000 Total$808,000 There are 23,000 shares of stock outstanding. What is the current share price? What will the ex-dividend price be?

The stock price is the total market value of equity divided by the shares outstanding, so: P0 = $661,000 equity/23,000 shares P0 = $28.74 per share The shares outstanding will increase by 20 percent, so: New shares outstanding = 23,000(1.20) New shares outstanding = 27,600 The new stock price is the market value of equity divided by the new shares outstanding, so: PX = $661,000/27,600 shares PX = $23.95

You own 230 shares of stock in Green Mild Chili Peppers, Inc., that currently sell for $50.70 per share. The company has announced a dividend of $2.59 per share with an ex-dividend date of May 3. Assuming no taxes, what is the value of your portfolio on May 3

The value of the portfolio ex-dividend is $ 11,065.30 Explanation: On May 3, when the stock would have gone ex-dividend , it is expected that the share price would be marked down by the value of dividend paid,hence the portfolio should now be valued at ex-dividend price The ex-dividend price =share price before dividend-dividend share price before dividend is $50.70 ex-dividend is $2.59 ex-dividend price=$50.70-$2.59 =$48.11 Value of portfolio=number of shares*ex-dividend price number of shares is 230 value of portfolio=230*$48.11 =$ 11,065.30

Roll Corporation (RC) currently has 490,000 shares of stock outstanding that sell for $50 per share. Assuming no market imperfections or tax effects exist, what will the share price be after: a. RC has a five-for-three stock split? b. RC has a 20 percent stock dividend? c. RC has a 55.5 percent stock dividend? d. RC has a 3-for-7 reverse stock split? e. Determine the new number of shares outstanding in parts (a) through (d)

To find the new stock price, we multiply the current stock price by the ratio of old shares to new shares, so: a.New share price = $50(3/5) New share price = $30.00 b.New share price = $50(1/1.20) New share price = $41.67 c.New share price = $50(1/1.555) New share price = $32.15 d.New share price = $50(7/3) New share price = $116.67 e. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so: a:New shares outstanding = 490,000(5/3) New shares outstanding = 816,667 shares b:New shares outstanding = 490,000(1.20) New shares outstanding = 588,000 shares c:New shares outstanding = 490,000(1.555) New shares outstanding = 761,950 shares d:New shares outstanding = 490,000(3/7) New shares outstanding = 210,000 shares

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (P0 - PX)/D = (1 - TP)/(1 - TG) Here P0 is the price just before the stock goes ex, PX is the ex-dividend share price, D is the amount of the dividend per share, TP is the relevant marginal personal tax rate on dividends, and TG is the effective marginal tax rate on capital gains. a. If TP = TG = 0, how much will the share price fall when the stock goes ex? D P0 PX b. If TP = 17 percent and TG = 0, how much will the share price fall? c. If TP = 18 percent and TG = 23 percent, how much will the share price fall? d. Suppose the only owners of stock are corporations. Recall that corporations get at least a 50 percent exemption from taxation on the dividend income they receive, but they do not get such an exemption on capital gains. If the corporation's income and capital gains tax rates are both 23 percent, how much will the share price fall?

Using the equation for the decline in the stock price ex-dividend for each of the tax rate policies, we get: (P0 - PX)/D = (1 - TP)/(1 - TG) a. P0 - PX = D(1 - 0)/(1 - 0) P0 - PX = D b. P0 - PX = D(1 - .17)/(1 - 0) P0 - PX = .83D c. P0 - PX = D(1 - .18)/(1 - .23) P0 - PX = 1.0649D d. With this tax policy, we need to multiply the personal tax rate times one minus the dividend exemption percentage, so: P0 - PX = D[1 - (.23)(.50)]/(1 - .23) P0 - PX = 1.1494D

Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case, $17,000 would be spent. Current earnings are $1.60 per share and the stock currently sells for $40 per share. There are 2,500 shares outstanding. Ignore taxes and other imperfections. a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b.What will be the effect on the company's EPS and PE ratio under the two different scenarios?

a. If the company makes a dividend payment, we can calculate the wealth of a shareholder as: Dividend per share = $17,000/2,500 shares Dividend per share = $6.80 The stock price after the dividend payment will be: PX = $40 - 6.80 PX = $33.20 per share The shareholder will have a stock worth $33.20 and a $6.80 dividend for a total wealth of $40. If the company makes a repurchase, the company will repurchase: Shares repurchased = $17,000/$40 Shares repurchased = 425.00 shares If the shareholder lets their shares be repurchased, they will have $40 in cash. If the shareholder keeps their shares, they're still worth $40. b. If the company pays dividends, the current EPS is $1.60, and the PE ratio is: PE = $33.20/$1.60 PE = 20.75 If the company repurchases stock, the number of shares will decrease. The total net income is the EPS times the current number of shares outstanding. Dividing net income by the new number of shares outstanding, we find the EPS under the repurchase is: EPS = $1.60(2,500)/(2,500 - 425.00) EPS = $1.93 The stock price will remain at $40 per share, so the PE ratio is: PE = $40/$1.93 PE = 20.75

The Mann Company belongs to a risk class for which the appropriate discount rate is 14 percent. The company currently has 239,000 outstanding shares selling at $148 each. The firm is contemplating the declaration of a $3 dividend at the end of the fiscal year that just began. Assume there are no taxes on dividends. Answer the following questions based on the Miller and Modigliani model, which is discussed in the text. a. What will be the price of the stock on the ex-dividend date if the dividend is declared? (Do not round intermediate calculations.) b. What will be the price of the stock at the end of the year if the dividend is not declared? (Do not round intermediate calculations.) c. If the company makes $6.4 million of new investments at the beginning of the period, earns net income of $3.8 million, and pays the dividend at the end of the year, how many shares of new stock must the firm issue to meet its funding needs?

a. If the dividend is declared, the price of the stock will drop on the ex-dividend date by the value of the dividend, $3. It will then trade for $145. b. If it is not declared, the price will remain at $148. c. Mann's outflows for investments are $6,400,000. These outflows occur immediately. One year from now, the firm will realize $3,800,000 in net income and it will pay $717,000 in dividends, but the need for financing is immediate. Mann must finance $6,400,000 through the sale of shares worth $148. It must sell $6,400,000/$148 = 43,243 shares.

The net income of Zippy Corporation is $94,000. The company has 25,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1,800,000. The appropriate discount rate for the company is 11 percent and the dividend tax rate is zero. a. What is the current value of the firm assuming the current dividend has not yet been paid? b. What is the ex-dividend price of the company's stock if the board follows its current policy? At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing the company's price. They proposed that the company sell enough new shares to finance a $4.96 dividend. c-1. Calculate the current value of the firm. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c-2. If the proposal is adopted, at what price will the new shares sell? How many will be sold?

a. Since the firm has a 100 percent payout policy, the entire net income, $94,000 will be paid as a dividend. The current value of the firm is the discounted value one year from now, plus the current income, which is: Value = $94,000 + $1,800,000/1.11 Value = $1,715,621.62 b. The current stock price is the value of the firm, divided by the shares outstanding, which is: Stock price = $1,715,621.62/25,000 Stock price = $68.62 Since the company has a 100 percent payout policy, the current dividend per share will be the company's net income, divided by the shares outstanding, or: Current dividend = $94,000/25,000 Current dividend = $3.76 The stock price will fall by the value of the dividend to: Ex-dividend stock price = $68.62 − 3.76 Ex-dividend stock price = $64.86 c-1. According to MM, it cannot be true that the low dividend is depressing the price. Since dividend policy is irrelevant, the level of the dividend should not matter. Any funds not distributed as dividends add to the value of the firm, hence the stock price. These directors merely want to change the timing of the dividends (more now, less in the future). As the calculations below indicate, the value of the firm is unchanged by their proposal. Therefore, the share price will be unchanged. To show this, consider what would happen if the dividend were increased to $4.96. Since only the existing shareholders will get the dividend, the required dollar amount to pay the dividends is: Total dividends = $4.96(25,000) Total dividends = $124,000 To fund this dividend payment, the company must raise: Dollars raised = Required funds − Net income Dollars raised = $124,000 − 94,000 Dollars raised = $30,000 This money can only be raised with the sale of new equity to maintain the all-equity financing. Since those new shareholders must also earn 11 percent, their share of the firm one year from now is: New shareholder value in one year = $30,000(1.11) New shareholder value in one year = $33,300 This means that the old shareholders' interest falls to: Old shareholder value in one year = $1,800,000 − 33,300 Old shareholder value in one year = $1,766,700 Under this scenario, the current value of the firm is: Value = $124,000 + $1,766,700/1.11 Value = $1,715,621.62 Since the firm value is the same as in part (a), the change in dividend policy had no effect. c-2. The new shareholders are not entitled to receive the current dividend. They will receive only the value of the equity one year hence. The present value of those flows is: Present value = $1,766,700/1.11 Present value = $1,591,621.62 And the current share price will be: Current share price = $1,591,621.62/25,000 Current share price = $63.66 So, the number of new shares the company must sell will be: Shares sold = $30,000/$63.66 Shares sold = 471.22 shares

A firm has a market value equal to its book value. Currently, the firm has excess cash of $300 and other assets of $6,200. Equity is worth $5,000. The firm has 500 shares of stock outstanding and net income of $720. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

new earnings per share is $1.53 Explanation: Given data excess cash = $300 Equity is worth = $5,000 other assets = $6,200 stock outstanding = 500 shares net income = $720 to find out new earnings per share solution we know that equity per value is Equity / stock outstanding that is equity per value = (5000 / 500) = 10 equity per value = $10 and we can purchase equity with excess cash $300 that is = excess cash / equity per value purchase equity with excess cash = (300 / 10) = 30 purchase equity with excess cash = 30 shares so after repurchase we have balance share is = (500 - 30) = 470 balance share = 470 shares so that new earnings per share will be = net income / balance share new earnings per share = (720 / 470) = 1.53 new earnings per share is $1.53

A ____ will increase the number of shares outstanding without affecting the book value of any of the owners' equity account values.

stock split