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CorporateFinance15

State/ProvincialEvent#2

CAREER CLUSTER
Finance
CAREER PATHWAY
CorporateFinance
INSTRUCTIONAL AREA
FinancialAnalysis

Published2015byDECAInc.Copyright2015byDECAInc.Nopartofthispublicationmaybereproducedfor
resaleorpostedonlinewithoutwrittenpermissionfromthepublisher.PrintedintheUnitedStatesofAmerica.

CorporateFinance15
State/ProvincialEvent#2

CORPORATE FINANCE EVENT


PARTICIPANT INSTRUCTIONS
PROCEDURES
1. Theeventwillbepresentedtoyouthroughyourreadingoftheseinstructions,includingthe
PerformanceIndicatorsandEventSituation.Youwillhaveupto30minutestoreviewthis
informationtodeterminehowyouwillhandletheroleplaysituationanddemonstratethe
performanceindicatorsofthisevent.Duringthepreparationperiod,youmaymakenotesto
useduringtheroleplaysituation.
2. Youwillhaveupto15minutestoroleplayyoursituationwithajudge(youmayhavemore
thanonejudge).
3. Youwillbeevaluatedonhowwellyoumeettheperformanceindicatorsofthisevent.
4. Turninallyournotesandeventmaterialswhenyouhavecompletedtheroleplay.

PERFORMANCE INDICATORS
1. Explainformsofdividends.
2. Discussfactorstoconsiderwhendecidingontheformofdividenddistribution.
3. Calculatethecostofpreferredstock.
4. Calculatethecostofcommonstock.
5. Describetheimpactofdividendsonthevalueofthefirm.
EVENT SITUATION
YouaretoassumetheroleofCFOatPEAR,anewcompanyinthetechnologyindustry.The
CEO(judge)hasaskedyoutolookintotheeffectofpayingoutdividends.
PEARwasincorporatedonJanuary1st,2012.AttheirfirstIPO,theyissued10,000sharesof
cumulative,6%preferredstockwithaparvalueof$50.Theyalsoissued100,000sharesof
commonstockonthatdate.

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Duringthefirstyear,PEARmadeaprofitof$50,000butdidnotpayoutanydividends.
In2013,PEARmadeaprofitof$200,000andonDecember1 stdeclareddividendsof$75,000to
bepaidonDecember31stforstockholdersofrecordonDecember15th.
DuringJanuaryof2014,PEARissued5,000moresharesofcumulative6%preferredstockwith
aparvalueof$50and50,000moresharesofcommonstock.In2014,PEARmadeaprofitof
$500,000andonDecember1stdeclareddividendsof$150,000tobepaidonDecember31 stfor
stockholdersofrecordonDecember15th.
TheCEO(judge)hasaskedforyoutocalculatethedividendpaymentstobedisbursedtothe
varioustypesofshareholders. Additionally,theCEO(judge)hasaskedthatyouevaluatethe
impactofdividendsonthevalueofthefirm.
YouwillpresentandexplainyourcalculationsandrecommendationstotheCEO(judge)ina
roleplaytotakeplaceintheCEOs(judges)office.TheCEO(judge)willbegintheroleplay
bygreetingyouandaskingtoseeyourcalculations.Afteryouhavepresentedyourmaterialand
haveansweredtheCEOs(judges)questions,theCEO(judge)willconcludetheroleplayby
thankingyouforyourwork.

JUDGES INSTRUCTIONS
DIRECTIONS, PROCEDURES AND JUDGES ROLE
In preparation for this event, you should review the following information with your event
managerandotherjudges:
1. Procedures
2. PerformanceIndicators
3. EventSituation
4. JudgeRoleplayCharacterization
Participantsmayconductaslightlydifferenttypeofmeetingand/ordiscussionwithyou
eachtime;however,itisimportantthattheinformationyouprovideandthequestions
youaskbeuniformforeveryparticipant.
5. JudgesEvaluationInstructions
6. JudgesEvaluationForm

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Pleaseuseacriticalandconsistenteyeinratingeachparticipant.
JUDGE ROLE-PLAY CHARACTERIZATION
YouaretoassumetheroleofCEOatPEAR,anewcompanyinthetechnologyindustry.You
haveaskedtheCFO(participant)tolookintotheeffectofpayingoutdividends.
PEARwasincorporatedonJanuary1st,2012.AttheirfirstIPO,theyissued10,000sharesof
cumulative,6%preferredstockwithaparvalueof$50.Theyalsoissued100,000sharesof
commonstockonthatdate.
Duringthefirstyear,PEARmadeaprofitof$50,000butdidnotpayoutanydividends.
In2013,PEARmadeaprofitof$200,000andonDecember1 stdeclareddividendsof$75,000to
bepaidonDecember31stforstockholdersofrecordonDecember15th.
DuringJanuaryof2014,PEARissued5,000moresharesofcumulative6%preferredstockwith
aparvalueof$50and50,000moresharesofcommonstock.In2014,PEARmadeaprofitof
$500,000andonDecember1stdeclareddividendsof$150,000tobepaidonDecember31 stfor
stockholdersofrecordonDecember15th.
YouhaveaskedtheCFO(participant)tocalculatethedividendpaymentstobedisbursedtothe
varioustypesofshareholders.Additionally,youhaveaskedthattheCFO(participant)evaluate
theimpactofdividendsonthevalueofthefirm.
TheCFO(participant)willpresentandexplainthecalculationsandrecommendationstoyouina
roleplaytotakeplaceintheyouroffice.YouwillbegintheroleplaybygreetingtheCFO
(participant)andaskingtoseethecalculationsandheartherecommendations.AftertheCFO
(participant)haspresentedthematerialandhaveansweredyourquestions,youwillconcludethe
roleplaybythankingtheCFO(participant)fortheirwork.
Duringthecourseoftheroleplayyouaretoaskthefollowingquestionsofeachparticipant:
1. Whywouldacompanydecidetopayoutdividends?
2. Whatmustacorporationhaveinordertodeclarecashdividends?
3. Asacommonstockholder,wouldyoupreferthepreferredstocktobecumulativeor
noncumulative?

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OncetheCFO(participant)hasmadetheirpresentationandhasansweredyourquestions,you
willconcludetheroleplaybythankingtheCFO(participant)forthework.
Youarenottomakeanycommentsaftertheeventisoverexcepttothanktheparticipant.
.
SOLUTION
1.

A dividend is a distribution to stockholders on a proportional (pro rata) basis in the form


of property, scrip (a promissory note to pay cash), stock, or cash. The latter two are the
most common.

2. Cash dividends can only be paid out if the company has enough cash and enough retained
earnings. If a company doesnt have enough cash or retained earnings but wants to
declare a dividend, they should give a stock dividend.
3. Answers will vary but may include:
Issuing preferred stock results in the cost of paying dividends, which are not tax
deductible. Raising money through debt results in the payment of interest, which is tax
deductible, making some companies prefer to raise capital through debt rather than
through issuing stock.
For PEAR, in 2012 and 2013, there are 10,000 preferred shares issued and outstanding.
Each preferred stock pays out $3 per year in dividends ($50*.06). As a group, preferred
stockholders expect $30,000 each year in dividends. In 2014, preferred stockholders as a
group expect $45,000.
6% payout rate on preferred stock should be compared to cost of borrowing money. CFO
(participant) may make assumptions such as the following. If PEAR borrows $500,000
(assuming P/S sold at par) at 8%, the interest each year would be $40,000. However
since interest is tax deductible, if the corporate tax rate is 30% the net cost would be
$28,000 versus $30,000 in dividend payment on $500,000, making raising capital
through debt cheaper than through issuing stock.
4. Raising funds through issuing common stock dilutes the proportionate interest of the
company that each stock owns. Common stockholders only receive dividends after all
preferred stock dividends have been paid.
Amount paid in
dividends
P/S Group Expect
P/S Group Get
1 P/S gets

2012
$0

2013
$75,000

2014
$150,000

$30,000
$0
$0

$30,000
$60,000
$6

$45,000
$45,000
$3

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Dividends in Arrears
C/S Group Get
1 C/S gets

$30,000
$0
$0

$15,000
$0.15

$105,000
$0.70

5. Cash dividends result in reduced assets and reduced stockholders equity. Therefore, the
value of the firm is reduced. Stock dividends results in no change in assets or stockholder
equity totals, although they do change the composition of stockholder equity, transferring
some of the retained earnings to paid-in capital. Stock dividends increase the number of
shares outstanding resulting in lower earnings per share.

Answers to Judges Questions


1. Corporations pay out dividends:
If they have an excess of cash.
Because it is expected by their shareholders.
If they are at the mature stage of a corporate life cycle arent experiencing a lot of
growth.
Because investors like the idea of a steady income.
Because it is seen as a sign of strength and sign of positive expectations for the
future.
2. To pay out a cash dividend, a corporation must have
A declaration by the board to pay dividends
Adequate cash
Adequate retained earnings.
3. Non-cumulative because more of the dividend distribution would be available to common
stockholders, since there arent dividends in arrears in non-cumulative preferred stock.

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JUDGES EVALUATION INSTRUCTIONS


Evaluation Form Information
The participants are to be evaluated on their ability to perform the specific performance
indicatorsstatedonthecoversheetofthiseventandrestatedontheJudgesEvaluationForm.
Althoughyoumayseeotherperformanceindicators beingdemonstratedbytheparticipants,
thoselistedinthePerformanceIndicatorssectionarethecriticalonesyouaremeasuringforthis
particular event. Please note that an overall score of 70% indicates a minimum level of
acceptableperformance.
Evaluation Form Interpretation
Theevaluationlevels listedbelow andtheevaluationratingprocedures shouldbediscussed
thoroughlywithyoureventchairpersonandtheotherjudgestoensurecompleteandcommon
understandingforjudgingconsistency.
Level of Evaluation

Interpretation Level

ExceedsExpectations

Participantdemonstratedtheperformanceindicatorin
an extremely professional manner; greatly exceeds
business standards; would rank in the top 10% of
business personnel performing this performance
indicator.

MeetsExpectations

Participantdemonstratedtheperformanceindicatorin
an acceptable and effective manner; meets at least
minimalbusinessstandards;therewouldbenoneedfor
additionalformalizedtrainingatthistime;wouldrank
in the 7089th percentile of business personnel
performingthisperformanceindicator.

BelowExpectations

Participant demonstrated the performance indicator


with limited effectiveness; performance generally fell
belowminimalbusinessstandards;additionaltraining
would be required to improve knowledge, attitude
and/or skills; would rank in the 5069 th percentile of
business personnel performing this performance
indicator.

Little/NoDemonstration

Participant demonstrated the performance indicator


withlittleornoeffectiveness;agreatdealofformal
training would be needed immediately; perhaps this
personshouldseekotheremployment;wouldrankin

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the049th percentileofbusinesspersonnelperforming
thisperformanceindicator.

CORPORATE FINANCE, 2015

Participant: _____________________________

JUDGES EVALUATION FORM


STATE/PROVINCIAL EVENT #2

I.D. Number: ____________________________

INSTRUCTIONAL AREA
Financial Analysis

Did the participant:

Little/No
Value

Below
Expectations

Meets
Expectations

Exceeds
Expectations

1.

Explain forms of dividends?

0-1-2-3-4-5

6-7-8-9-10-11

12-13-14-15

16-17-18

2.

Discuss factors to consider when


deciding on the form of dividend
distribution?

0-1-2-3-4-5

6-7-8-9-10-11

12-13-14-15

16-17-18

3.

Calculate the cost of preferred stock?

0-1-2-3-4-5

6-7-8-9-10-11

12-13-14-15

16-17-18

4.

Calculate the cost of common stock?

0-1-2-3-4-5

6-7-8-9-10-11

12-13-14-15

16-17-18

0-1-2-3-4-5

6-7-8-9-10-11

12-13-14-15

16-17-18

0-1-2

3-4-5

6-7-8

9-10

5.
6.

Describe the impact of dividends on


the value of the firm?
Overall impression and response to
judges questions.

TOTAL SCORE

Judged
Score