AQ064-3-3-CFIN- Corporate Finance

Tutorial: Dividends and Distribution Decision

1.Why dividend increases typically good news for investors and dividend cuts bad news?
Explain briefly.

2.What is the tax reason for not paying generous cash dividends?

3.Big Industries has the following market-value balance sheet. The stock currently sells for $20 a
share, and there are 1,000 shares outstanding. The firm will either pay a $1 per share dividend
or repurchase $1,000 worth of stock. Ignore taxes.

Assets Liabilities and Equity

Cash $ 2,000 Debt $ 10,000
Fixed assets 28,000 Equity 20,000

a. What will be the subsequent price per share under each alternative (dividend versus
repurchase)?
b.If total earnings of the firm are $2,000 a year, find earnings per share under each alternative.
c. Find the price-earnings ratio under each alternative.

4.Suppose that you own 1,000 shares of Nocash Corp. and the company is about to pay a 25%
stock dividend. The stock currently sells at $100 per share.

a. What will be the number of shares that you hold and the total value of your equity position
after the dividend is paid?
b.What will happen to the number of shares that you hold and the value of your equity position
if the firm splits five for four instead of paying the stock dividend?

5. Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either

case, $9,000 would be spent. Current earnings are $1.30 per share, and the stock currently sells
for $64 per share. There are 1,000 shares outstanding. Ignore taxes and other imperfections in
answering the first two questions.

a. Evaluate the two alternatives in terms of the effect on the price per share of the
stock and shareholder wealth.
b. What will be the effect on Flychucker’s EPS and PE ratio under the two different
scenarios?
c. In real world, which of these actions would you recommend? Why?