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Distribution to Shareholders - Problems

I. Residual Dividend Model

 Way to get the dividend/payout by getting the residual of the net

income;
 Use RE to for equity portion of the capital budget;
 Formula: Dividends = NI – ((Capital budget x Wc);

 Sample Problem

Capital budget = P800,000; Capital structure Wc=60%, Wd=40%

Forecasted NI = P600,000

a) Dividends = ? b) Payout ratio = ?

Solution: = P600,000 – (P800,000 x 60%)

= P120,000 dividends
= P120,000/ P600,000 = 20% payout

NI = P400,000; dividends = 0 or (P80,000) Payout=0%

NI = P800,000; dividends = P320,000 Payout = 40%

II. Stock Dividends and Stock Splits

 Stock dividends: give shares instead of cash; no change in total

capital or shareholders equity; transfer of capital from RE to
contributed capital;
 Large vs. small stock dividends: large (20% or more; use par value);
small (less than 20%, use market value per share)

 Sample problem

Ace Company has 10,000 shares outstanding with P1 par value.

Each stock is currently selling at P5 per share. Ace declared and
distributed a 30% stock dividend.

a) What is the increase in the no. of shares?

Increase in shares = 10,000 shares x 30% = 3,000 shares

b) What is the amount of retained earnings to be transferred to the

contributed capital (amount of stock dividends)?

Amount of stock dividends = 3,000 x P1 = P3,000

c) What are the amounts of increases in the common stock or

ordinary share capital and share premium-ordinary?

Increase in common stock (par) = P3,000

Increase in share premium = P0
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d) What is the market value per share after the stock dividend?

Market value per share after the stock dividend

= (P10,000 x P5)/ 13,000 shares = P3.85

e) If the stock dividend is 10%, What is the increase in the no. of

shares?

Increase in shares = 10,000 shares x 10% =1,000 shares

f) In relation to item e), what is the amount of retained earnings to be

transferred to the contributed capital (amount of stock dividends)?

Amount of stock dividends = 1,000 x P5= P5,000

g) In relation to item e, what are the amounts of increases in the

commons stock (par value) or ordinary share capital and share
premium?

Increase in common stock(par) = 1,000 x P1 = P1,000

Increase in share premium = 1,000 x (P5-P1) = P4,000

h) In relation to item e, what is the market value per share after the
stock dividend?

Market value per share after the stock dividend

= (P10,000 x P5)/ 11,000 shares = P4.55

 Stock split: increase the number for shares;

 e.g. 2:1 or 2 for 1; receive 2 shares for every 1 share held
 reverse stock split, decreases the number of shares; e.g. 1 for 2 or 1:2,
receive 1 share for every 2 shares held

 Sample problem

Jack Co. had 100,000 shares of common stock with P50 par issued
and outstanding. Jack declared a 2:1 split (2-for-1 stock split).
Thereafter, Jack declared and paid P1.5 cash dividend per share.

a) How many shares were outstanding after the split?

Shares outstanding after the split = 100,000 shares x 2

= 200,000 shares

b) How much dividends were declared and paid?

Total dividends = 200,000 shares x P1.5 = P300,000

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III. Repurchases

 Sample problem

Queen Company has 10,000 shares outstanding with par value of P1

and stock price per share of P12. Net income for the year is
P100,000.

Queen plans to pay cash dividend amounting to P50,000 (P5 per

share). However, a director suggested to just repurchase P50,000
worth of stocks at the current market price instead of giving P50,000
cash dividend.

a) What is the price earnings ratio before the repurchase?

EPS = P100,000/10,000 shares = P10

P/E ratio = P12/P10 = P1.20

b) How many shares are outstanding after the repurchase?

Shares to be repurchased = P50,000/P12 = 4,166.67 shares

Share outstanding after the repurchase = 10,000 – 4,166,67

= 5,833.33 shares

c) What will be the new EPS after the repurchase assuming there is
no change in the net income?

New EPS = P100,000/5,833.33 = P17.14

d) What will be the new P/E ratio after the repurchase?

New P/E = Stock Price/ New EPS

= P12/P17.14
= P0.70

e) Assuming that the stock will be repurchased at P17 a share, what

will be the stock price after the repurchase assuming that the
stock sells at the old P/E and there is no change in the net
income?

Shares to be repurchased = P50,000/P17 = 2,941.18 shares

Share outstanding after the repurchase = 10,000 – 2,941.18

=7,058.82 shares

New EPS = P100,000/7,058.82 = P14.17

P1.20 = New Stock Price/ P14.17

New Stock Price = P17
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