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1.
value:
1.00 points
Problem 17-1 Residual claims to earnings [LO1]
|
Diploma Mills has $33 million in earnings, pays $4.30 million in interest to bondholders, and $2.65 million in dividends to preferred stockholders. |
|
(a) |
What are the common stockholders’ residual claims to earnings? (Enter your answer in millions of dollars rounded to 2 decimal places. Omit the “$” sign in your response.) |
|
Residual claims to earnings |
$ | $ |
[removed] |
33.
value: 4.00 points
Problem 18-21 Cash dividend versus stock repurchase [LO5]
|
The Carlton Corporation has $4 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E ratio of 10. The firm has $1 million in excess cash. |
|
(a) |
Compute the current price of the stock. (Omit the “$” sign in your response.) |
|
Current price |
$ [removed] |
|
(b) |
If the $1 million is used to pay dividends, how much will dividends per share be? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Dividends per share |
|
(c) |
If the $1 million is used to repurchase shares in the market at a price of $41.00 per share, how many shares will be acquired? (Round your answer to the nearest whole number.) |
|
Number of shares acquired |
|
(d) |
What will the new earnings per share be? (Round your intermediate calculations to the nearest whole number and final answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Earning per share |
|
(e-1) |
If the P/E ratio remains constant, what will the price of the securities be? (Round your intermediate calculations and final answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Price of securities |
|
(e-2) |
By how much, in terms of dollars, did the repurchase increase the stock price? (Round your intermediate calculations and final answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Stock price increase / decrease |
|
(f) |
Has the stockholders’ total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividends? |
| [removed]Yes[removed]No |
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34.
value: 4.00 points
Problem 18-22 Retaining funds versus paying them out [LO1]
|
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. |
|
Year |
Net income |
Profitable capital expenditure |
|
|
15 million |
8 million |
||
|
25 million |
12 million |
||
|
9 million |
7 million |
||
|
16 million |
|
The Hastings Corporation has 2 million shares outstanding (the following questions are separate from each other). |
|
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. Omit the “$” sign in your response.) |
|
Total cash dividends |
$ [removed] million |
|
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 rounded to 1 decimal place. Omit the “$” sign in your response.) |
Total cash dividends$ [removed] million
|
If the firm pays 10 percent stock dividends in years 2 through 5, and also pays a cash dividend of $2.40 per share for each of the five years, how much in total dividends will be paid? (Assume cash dividend is paid after the stock dividend.) (Omit the “$” sign in your response.) |
|
Assume the payout ratio in each year is to be 20 percent of net income and the firm will pay 10 percent stock dividends 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. Omit the “$” sign in your response.) |
Busi
3
2
0
1
.
value:
1.00 points
Problem 17-1 Residual claims to earnings [LO1]
Diploma Mills has
$
33
million
in earnings, pays $
4
.
30
million in interest to bondholders, and $
2.
6
5
million in dividends to p
refer
red stockholders.
|
(a) |
What are the common stockholders’ residual claims to earnings? (Enter your answer in millions of dollars rounded to 2 decimal places. Omit the “$” sign in your response.) |
|
Residual claims to earnings |
$ million |
2.
value:
1.00 points
Problem 17-2 Residual claims to earnings [LO1]
Text-Messaging Inc. has $76 million in earnings and is considering paying $
8
.
60 million in interest to bondholders and $
6.
80 million in dividends to preferred stockholders. Use Table 17-
3.
|
What are the bondholders contractual claims to payment? (Enter your answer in millions of dollars rounded to 2 decimal places. Omit the “$” sign in your response.) |
|
Legal contractual claim |
$ million
|
3.
value:
1.00 points
Problem 17-3 Poison pill [LO4]
|
Steele Pipe Co. has 13,300,000 shares of stock outstanding, currently selling at $52 per share. If an unfriendly outside group acquired 25 percent of the shares, existing stockholders will be able to buy new shares at 30 percent below the currently existing stock price. |
|
How many shares must the unfriendly outside group acquire for the poison pill to go into effect? |
|
Number of shares |
|
(b) |
What will be the new purchase price for the existing stockholders? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
New purchase price
$
4.
value:
1.00 points
Problem 17-4 Cumulative voting [LO2]
|
Russell Stover Jr. wishes to know how many shares are necessary to elect 3 directors out of 9 directors up for election for the Tasty Candy Company board. There are 77,000 shares outstanding. |
Number of shares
5.
value:
1.00 points
Problem 17-7 Cumulative voting [LO2]
|
Betsy Ross owns 945 shares in the Hanson Fabrics Company. There are 14 directors to be elected. Thirty-six thousand five hundred shares are outstanding. The firm has adopted cumulative voting. |
|
How many total votes can be cast? |
|
Total votes |
|
How many votes does Betsy control? |
|
Votes |
|
(c) |
What percentage of the total votes does she control? (Round your answer to 2 decimal places. Omit the “ % ” sign in your response.) |
|
Percentage of votes |
% |
6.
value:
1.00 points
Problem 17-9 Dissident stockholder group and cumulative voting [LO2]
|
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 14 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 38,001 shares. Ms. Ramsey and her friends on the board control 48,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 22,998 shares. The company uses cumulative voting. |
|
(a) |
How many directors can Mr. Clark be sure of electing? (Round down your answer to the nearest whole number.) |
|
Number of directors |
|
(b) |
How many directors can Ms. Ramsey and her friends be sure of electing? (Round down your answer to the nearest whole number.) |
Number of directors
|
(c-1) |
How many directors could Mr. Clark elect if he obtains all the proxies for the uncommitted votes?(Round down your answer to the nearest whole number.) |
Number of directors
|
(c-2) |
Will he control the board? |
|
7.
value:
1.00 points
Problem 17-11 Strategies under cumulative voting [LO2]
|
Mr. Michaels controls proxies for 39,000 of the 72,000 outstanding shares of Northern Airlines. Mr. Baker heads a dissident group that controls the remaining 33,000 shares. Baker has 231,000 votes (33,000 × 7). There are seven board members to be elected and cumulative voting rules apply. Michaels does not understand cumulative voting and plans to cast 100,000 of his 273,000 (39,000 × 7) votes for his brother-in-law, Scott. His remaining votes will be spread evenly for three other candidates. |
|
How many directors can Baker elect if Michaels acts as described above? |
Number of directors
8.
value:
1.00 points
Problem 17-12 Different classes of voting stock [LO1]
|
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 9 votes per share. The normally traded common stock, designated as Class B, is entitled to 1 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 1,750,000 total shares currently outstanding, the original founder’s family owns 52,425 shares. |
|
What is the percentage of the founder’s family votes to Class B votes? (Round your answer to 2 decimal places. Omit the “%” sign in your response.) |
|
% |
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9.
value:
1.00 points
Problem 17-14 Procedures associated with a rights offering [LO3]
|
Computer Graphics has announced a rights offering for its shareholders. Carol Stevens owns 2,200 shares of Computer Graphics stock. Five rights plus $62 cash are needed to buy one of the new shares. The stock is currently selling for $77 rights-on. |
|
What is the value of a right? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Value per right |
$ |
|
(b-1) |
How many of the new shares could Carol buy if she exercised all her rights? |
Number of shares
|
(b-2) |
How much cash would this require? (Omit the “$” sign in your response.) |
|
Cash required |
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10.
value:
2.00 points
Problem 17-15 Investing in rights [LO3]
|
Todd Winningham IV has $4,200 to invest. He has been looking at Gallagher Tennis Clubs, Inc., common stock. Gallagher has issued a rights offering to its common stockholders. Six rights plus $84 cash will buy one new share. Gallagher’s stock is selling for $96 ex-rights. |
|
(a-1) |
How many rights could Todd buy with his $4,200? |
|
Number of rights |
|
(a-2) |
Alternatively, how many shares of stock could he buy with the same $4,200 at $96 per share?(Round your answer to the nearest whole number.) |
Number of shares
|
If Todd invests his $4,200 in Gallagher rights and the price of Gallagher stock rises to $99 per share ex-rights, what would his dollar profit on the rights be? (First compute profits per right.) (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the “$” sign in your response.) |
|
Dollar profit |
|
(c) |
If Todd invests his $4,200 in Gallagher stock and the price of the stock rises to $99 per share ex-rights, what would his total dollar profit be? (Round your intermediate and final answers to the nearest whole number. Omit the “$” sign in your response.) |
|
Total dollar profit |
|
(d) |
If Todd invests his $4,200 in Gallagher rights and the price of Gallagher stock falls to $76 per share ex-rights instead of rising to $99, what would his dollar profit on the rights be? (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.) |
|
Dollar profit / loss |
|
(e) |
If Todd invests his $4,200 in Gallagher stock and the price of the stock falls to $76 per share ex-rights, what would his dollar profit on the rights be? (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.) |
|
Dollar profit / loss on the stock |
11.
value:
2.00 points
Problem 17-16 Effect of rights on stockholder position [LO3]
|
Mr. and Mrs. Anderson own 4 shares of Magic Tricks Corporation’s common stock. The market value of the stock is $72. The Andersons also have $52 in cash. They have just received word of a rights offering. one new share of stock can be purchased at $52 for each four shares currently owned (based on four rights). |
|
What is the value of a right? (Omit the “$” sign in your response.) |
Value per right
$
|
What is the value of the Andersons’ portfolio before the rights offering? (Omit the “$” sign in your response.) |
|
Portfolio value |
|
Compute the diluted value of the stock. (Omit the “$” sign in your response.) |
|
Diluted value |
|
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? (Omit the “$” sign in your response.) |
Portfolio value
$
|
If they sell their four rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio? (Omit the “$” sign in your response.) |
Portfolio value
$
12.
value:
2.00 points
Problem 17-20 Preferred stock dividends in arrears [LO5]
|
Robbins Petroleum Company is five years in arrears on cumulative preferred stock dividends. There are 650,000 preferred shares outstanding, and the annual dividend is $5.50 per share. The vice-president of finance sees no real hope of paying the dividends in arrears. She is devising a plan to compensate the preferred stockholders for 80 percent of the dividends in arrears. |
|
How much should the compensation be? (Omit the “$” sign in your response.) |
|
Compensation |
|
Robbins will compensate the preferred stockholders in the form of bonds paying 12 percent interest in a market environment in which the going rate of interest is 14 percent for similar bonds. The bonds will have a 15-year maturity. Indicate the market value of a $1,000 par value bond. Using the bond valuationTable 16-3, indicate the market value of a $1,000 par value bond. (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Bond value |
|
Based on market value, how many bonds must be issued to provide the compensation determined in part a? (Round your intermediate calculations to 2 decimal places and final answer to the nearestwhole number.) |
|
Bonds issued |
3.
value:
1.00 points
Problem 17-22 Borrowing funds to purchase preferred stock [LO5]
|
The treasurer of Kelly Bottling Company (a corporation) currently has $170,000 invested in preferred stock yielding 7 percent. He appreciates the tax advantages of preferred stock and is considering buying $170,000 more with borrowed funds. The cost of the borrowed funds is 9 percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the treasurer will be paying 2 percent more for funds than the company will be earning on the investment. Kelly Bottling is in a 34 percent tax bracket, with dividends taxed at 10 percent. |
|
Compute the amount of the aftertax income from the additional preferred stock if it is purchased. (Omit the “$” sign in your response.) |
|
Aftertax income |
|
Compute the aftertax borrowing cost to purchase the additional preferred stock. (Omit the “$” sign in your response.) |
|
Aftertax borrowing cost |
|
Should the treasurer proceed with his proposal? |
14.
value:
1.00 points
Problem 18-1 Payout ratio [LO1]
|
Neil Diamond Brokers, Inc., reported earnings per share of $8.00 and paid $3.40 in dividends. |
|
What is the payout ratio? (Round your answer to 1 decimal place. Omit the “%” sign in your response.) |
|
Payout ratio |
% |
15.
value:
1.00 points
Problem 18-2 Payout ratio [LO1]
|
Sewell Enterprises earned $ 24 5 million last year and retained $150 million. |
What is the payout ratio? (Round your answer to 1 decimal place. Omit the “%” sign in your response.)
Payout ratio
%
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16.
value:
1.00 points
Problem 18-3 Payout ratio [LO1]
|
Biogen, Inc., earned $1,570 million last year and had a 10 percent payout ratio. |
|
How much did the firm add to its retained earnings? (Enter your answer in dollars not in millions. Omit the “$” sign in your response.) |
|
Additional retained earnings |
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17.
value:
1.00 points
Problem 18-4 Dividends, retained earnings, and yield [LO1]
|
Polycom Systems earned $495 million last year and paid out 22 percent of earnings in dividends. |
|
By how much did the company’s retained earnings increase? (Enter your answer in dollars not in millions. Omit the “$” sign in your response.) |
Additional retained earnings
$
|
With 100 million shares outstanding and a stock price of $96, what was the dividend yield? (Hint: First compute dividends per share.) (Round your intermediate and final answer to 2 decimal places. Omit the “%” sign in your response.) |
|
Dividend yield |
18.
value:
1.00 points
Problem 18-5 Growth and dividend policy[LO2]
|
The following companies have different financial statistics. |
|
Turtle Co. |
Hare Corp. |
|||
|
Growth rate in sales and earnings |
24 | % | 8 | |
|
Cash as a percentage of total assets |
5 | 30 |
|
What dividend policy would you recommend for Turtle Co.? |
|
Low payout ratio High payout ratio |
|
What dividend policy would you recommend for Hare Corp.? |
|
High payout ratio Low payout ratio |
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9.
value:
2.00 points
Problem 18-6 Limits on dividends [LO3]
|
Carnegie Mellon and Produce Co. has $197,000,000 in stockholders’ equity. Forty million dollars is listed as common stock and the balance is in retained earnings. The firm has $265,000,000 in total assets and 2 percent of this value is in cash. Earnings for the year are $26,000,000 and are included in retained earnings. |
|
What is the legal limit on current dividends? (Enter your answer in dollars not in millions. Omit the “$” sign in your response.) |
|
Legal limit on current dividends |
|
What is the practical limit based on liquidity? (Enter your answer in dollars not in millions. Omit the “$” sign in your response.) |
|
Practical limit on current dividends |
|
If the company pays out the amount in part b, what is the dividend payout ratio? (Round your answer to 1 decimal place. Omit the “%” sign in your response.) |
20.
value:
2.00 points
Problem 18-7 Life cycle growth and dividends [LO2]
|
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 31 percent, and eventually reach 56 percent during the maturity stage (IV). |
|
Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. (Leave no cells blank – be certain to enter “0” wherever required. Round your answers to 2 decimal places. Omit the “$” sign in your response.) |
|
Stage I |
$ |
.30
|
|||||||||||||||||||
|
Stage II |
1.95 |
||||||||||||||||||||
|
Stage III |
2.80 |
||||||||||||||||||||
|
Stage IV |
3.40 |
|
Dividends |
|
Assume in Stage IV that an investor owns 290 shares and is in a 15 percent tax bracket (Environmental Systems is considered a high income taxpayer); what will be the investor’s aftertax income from the cash dividend? (Round your intermediate calculations and final answer to 2 decimal places. Omit the “$” sign in your response.) |
Aftertax income
$
|
In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select all that apply. Click the box with a check mark for the correct answer and click to empty the box for the wrong answer.) |
|
Stage I Stage II Stage III Stage IV |
21.
value:
2.00 points
Problem 18-8 Stock split and stock dividend [LO4]
|
Austin Power Company has the following balance sheet: |
|
Assets |
|||
| Cash |
40,000 |
||
|
Accounts receivable |
257,000 |
||
|
Fixed assets |
592,000 |
||
|
Total assets |
889,000 |
||
|
Liabilities |
|||
|
Accounts payable |
295,000 |
||
|
Notes payable |
51,000 |
||
|
Capital accounts |
Common stock (110,000 shares @ $2 par) |
2 20,000 |
|
|
Capital in excess of par |
100,000 |
||
|
Retained earnings |
223,000 |
||
|
Total liabilities & Owners Equity |
|
The firm has a market price of $13 a share. |
|
Show the new balance(s) in the capital account(s) after a two-for-one stock split. (Omit the “$” sign in your response.) |
|
Common stock |
||||||||||
|
Capital excess of par |
||||||||||
|
Retained earnings |
|
Show the new balance(s) in the capital account(s) after a 10 percent stock dividend. Part b is separate from part a. In part b do not assume the stock split has taken place. (Omit the “$” sign in your response.) |
|
Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends? |
|
Stock split Stock dividend
|
22.
value:
2.00 points
Problem 18-9 Policy on payout ratio [LO1]
|
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. |
|
Year |
Plan A |
Plan B |
|
|
1 |
$ 1.50 |
$ .40 |
|
|
2 |
1.50 |
2.50 |
|
|
3 |
.30 | ||
|
4 |
1.80 |
4.00 |
|
|
5 |
1.60 |
|
How much in total dividends per share will be paid under each plan over the five years? (Round your answers to 2 decimal places. Omit the “$” sign in your response.) |
|
Total dividends |
|||||
|
Plan A |
$ |
||||
|
Plan B |
$ |
|
(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 10 percent; the discount rate for Plan B is 14 percent. Compute the present value of future dividends. (Round “PV Factor” to 3 decimal places, intermediate and final answers to 2 decimal places. Omit the “$” sign in your response.) |
|
Present value of |
|
Which plan will provide the higher present value for the future dividends? |
|
|
Plan A Plan B |
23.
value:
1.00 points
Problem 18-10 Dividend yield [LO1]
|
The stock of North American Dandruff Company is selling at $95 per share. The firm pays a dividend of $3.10 per share. |
|
What is the dividend yield? (Round your answer to 3 decimal places. Omit the “%” sign in your response.) |
Dividend yield
%
|
If the firm has a payout rate of 25 percent, what is the firm’s P/E ratio? (Enter numeric value only. Round your intermediate calculations and final answer to 1 decimal place.) |
|
P/E ratio |
24.
value:
1.00 points
Problem 18-11 Dividend yield [LO1]
|
The shares of Charles Darwin Fitness Centers sell for $40. The firm has a P/E ratio of 20. Fifty percent of earnings are paid out in dividends. |
|
What is the firm’s dividend yield? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “%” sign in your response.) |
Dividend yield
%
25.
value:
1.00 points
Problem 18-12 Ex-dividend date and stock price [LO1]
|
The Ohio Freight Company’s common stock is selling for $80 the day before the stock goes ex-dividend. The annual dividend yield is 5.4 percent, and dividends are distributed quarterly. |
|
Based solely on the impact of the cash dividend, by how much should the stock go down on the ex-dividend date? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
|
The stock would go down by |
|
What will the new price of the stock be? (Round your intermediate and final answer to 2 decimal places. Omit the “$” sign in your response.) |
|
New stock price |
26.
value:
2.00 points
Problem 18-13 Stock dividend and cash dividend [LO4]
|
The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $6 per share. |
|
Common stock (20,000 shares at $1 par) |
20,000 | |||
|
Capital in excess of par |
||||
|
110,000 |
||||
|
150,000 |
||||
|
The firm intends to first declare a 10 percent stock dividend and then pay a 20-cent cash dividend (which also causes a reduction of retained earnings). |
|
Show the capital section of the balance sheet after the first transaction and then after the second transaction. (Omit the “$” sign in your response.) |
|
WESTERN PIPE CO. |
|
|
After 1st transaction |
|
|
After 2nd transaction |
|
$ |
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27.
value:
3.00 points
Problem 18-14 Cash dividend policy [LO1]
|
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: |
|
354,000 |
|
|
864,000 |
|
|
1,049,000 |
|
|
2,267,000 |
|
|
Liabilities and Stockholders’ Equity |
|
|
Accounts payable |
475,000 |
|
Long term payable |
312,000 |
|
Common stock (280,000 shares at $1 par) |
280,000 |
|
1,200,000 |
|
|
Total liabilities and stockholders’ equity |
|
From a legal perspective, what is the maximum amount of dividends per share the firm could pay?(Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Dividends per share |
|
Is this realistic? |
|||
|
Yes No |
|
In terms of cash availability, what is the maximum amount of dividends per share the firm could pay?(Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
Dividends per share
$
|
Assume the firm earned 22 percent return on stockholders’ equity last year. If the board wishes to pay out 40 percent of earnings in the form of dividends, how much will dividends per share be? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
Dividends per share
$
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28.
value:
2.00 points
Problem 18-16 Dividend valuation model and wealth maximization [LO2]
|
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 $2.50, Ke is 10 percent, and g is 4 percent. |
|
Under Plan A, D0 would be immediately increased to $2.70 and Ke and g will remain unchanged. |
|
Under Plan B, D0 will remain at $2.50 but g will go up to 5 percent and Ke will remain unchanged. |
|
Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0 × (1 + g), or $2.70 (1.04). Ke will equal 10 percent and g will equal 4 percent.(Round your intermediate calculations and final answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Stock price for Plan A |
|
Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0 × (1 + g), or $2.50 (1.05). Ke will be equal to 10 percent and g will be equal to 5 percent. (Round your intermediate calculations and final answer to 2 decimal places. Omit the “$” sign in your response.) |
|
Stock price for Plan B |
|
Which plan will produce the higher value? |
29.
value:
3.00 points
Problem 18-17 Stock split and its effect [LO4]
|
Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $25 to $50 per share. The firm’s current statement of stockholders’ equity is as follows: |
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Common stock (4 million shares issued |
40,000,000 |
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Paid-in capital in excess of par |
18,000,000 |
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37,000,000 |
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Net worth |
95,000,000 |
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How many shares would be outstanding after a two-for-one stock split? (Enter your answer in millions.) |
| million |
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What would be its par value? (Omit the “$” sign in your response.) |
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Par value |
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How many shares would be outstanding after a three-for-one stock split? (Enter your answer in millions.) |
Number of shares
million
Par value
$
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Assume that Wilson earned $ 16 million . What would be its earnings per share before and after the two-for-one split? After the three-for-one stock split?(Round your answers to 2 decimal places. Omit the “$” sign in your response.) |
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EPS before |
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EPS after 2-1 split |
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EPS after 3-1 split |
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(d) |
What would be the price per share after the two-for-one stock split? After the three-for-one stock split?(Assume that the price-earnings ratio of 12.50 stays the same.) (Round your answers to 2 decimal places. Omit the “$” sign in your response.) |
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Price after 2-1 split |
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Price after 3-1 split |
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30.
value:
3.00 points
Problem 18-18 Stock dividend and its effect [LO4]
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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. |
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The capital accounts for the firm are as follows: |
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Common stock (3,000,000 shares at $5 par) |
15,000,000 |
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Capital in excess of par* |
4,000,000 |
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24,000,000 |
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| Net worth |
43,000,000 |
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*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). |
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The company’s stock is selling for $40 per share. The company had total earnings of $12,000,000 during the year. With 3,000,000 shares outstanding, earnings per share were $4. The firm has a P/E ratio of 10. |
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What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts. (Omit the “$” sign in your response.) |
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What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.) (Round your intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.) |
| EPS | ||
| Stock price |
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How many shares would an investor end up with if he or she originally had 150 shares? |
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No. of shares |
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What is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant? (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the “$” sign in your response.) |
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Total investment |
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Before stock dividend |
$ |
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After stock dividend |
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31.
value:
5.00 points
Problem 18-19 Stock dividend and cash dividend [LO4]
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Health Systems, Inc. is considering a 15 percent stock dividend. The capital accounts are as follows: |
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Common stock (6,000,000 shares at $10 par) |
60,000,000 |
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35,000,000 |
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75,000,000 |
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170,000,000 |
*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).
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The company’s stock is selling for $32 per share. The company had total earnings of $19,200,000 with 6,000,000 shares outstanding and earnings per share were $3.20. The firm has a P/E ratio of 10. |
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What adjustments would have to be made to the capital accounts for a 15 percent stock dividend? Show the new capital accounts. (Omit the “$” sign in your response.) |
Common stock
$
Capital in excess of par
Retained earnings
Net worth
$
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What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant). (Round your intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.) |
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How many shares would an investor have if he or she originally had 80? |
No. of shares
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What is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant? (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the “$” sign in your response.) |
| Total investment |
(e)
Assume Mr. Heart, the president of Health Systems, wishes to benefit stockholders by keeping the cash dividend at a previous level of $1.25 in spite of the fact that the stockholders how have 15 percent more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $
32.
What is an investor’s total investment worth after the stock dividend if he/she had 80 shares before the stock dividend? (Omit the “$” sign in your response.)
| Total investment |
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(f) |
Under the scenario described in part e, is the investor better off? |
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(g) |
As a final question, what is the dividend yield on this stock under the scenario described in part e?(Round your answer to 2 decimal places. Omit the “%” sign in your response.) |
32.
value:
3.00 points
Problem 18-20 Reverse stock split [LO4]
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Double Vision Optical Company has had a lot of complaints from customers of late and its stock price is now only $3 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Johnnie Walker owns 120 shares. |
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How many shares will he own after the reverse stock split? |
Number of shares
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What is the anticipated price of the stock after the reverse stock split? (Omit the “$” sign in your response.) |
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Anticipated stock price |
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Because investors often have a negative reaction to a reverse 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? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
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How has the total value of Johnnie Walker’s holdings changed from before the reverse stock split to after the reverse stock split (based on the stock value computed in part c)? (Input the amount as positive value. Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
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Johnnie Walker’s holdings $ |
33.
value:
4.00 points
Problem 18-21 Cash dividend versus stock repurchase [LO5]
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The Carlton Corporation has $4 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E ratio of 10. The firm has $1 million in excess cash. |
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Compute the current price of the stock. (Omit the “$” sign in your response.) |
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Current price |
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If the $1 million is used to pay dividends, how much will dividends per share be? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
Dividends per share
$
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If the $1 million is used to repurchase shares in the market at a price of $41.00 per share, how many shares will be acquired? (Round your answer to the nearest whole number.) |
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Number of shares acquired |
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What will the new earnings per share be? (Round your intermediate calculations to the nearest whole number and final answer to 2 decimal places. Omit the “$” sign in your response.) |
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Earning per share |
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(e-1) |
If the P/E ratio remains constant, what will the price of the securities be? (Round your intermediate calculations and final answer to 2 decimal places. Omit the “$” sign in your response.) |
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Price of securities |
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(e-2) |
By how much, in terms of dollars, did the repurchase increase the stock price? (Round your intermediate calculations and final answer to 2 decimal places. Omit the “$” sign in your response.) |
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Stock price increase / decrease |
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(f) |
Has the stockholders’ total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividends? |
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34.
value:
4.00 points
Problem 18-22 Retaining funds versus paying them out [LO1]
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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. |
| Year |
Net income |
Profitable capital |
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| 1 |
15 million |
8 million |
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| 2 |
25 million |
12 million |
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| 3 |
9 million |
7 million |
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| 4 | ||||
| 16 million |
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The Hastings Corporation has 2 million shares outstanding (the following questions are separate from each other). |
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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. Omit the “$” sign in your response.) |
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Total cash dividends |
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If the firm simply uses a payout ratio of 20 percent of net income, how much in total cash dividends will be paid? (Enter your answer in millions rounded to 1 decimal place. Omit the “$” sign in your response.) |
Total cash dividends
$ million
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If the firm pays 10 percent stock dividends in years 2 through 5, and also pays a cash dividend of $2.40 per share for each of the five years, how much in total dividends will be paid? (Assume cash dividend is paid after the stock dividend.) (Omit the “$” sign in your response.) |
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Assume the payout ratio in each year is to be 20 percent of net income and the firm will pay 10 percent stock dividends 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. Omit the “$” sign in your response.) |
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Dividends per |
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