EXERCISES TOPIC 8

1. Dividend policy determines the distribution of a firm's earnings between retention

and dividend payments to stockholders.
T/F

2. The goal of dividend policy is to maximize its contribution towards increasing

shareholder wealth.
T/F

3. An optimal dividend policy balances stockholders' need for current cash flows
with the company's investment opportunities and future growth.

T/F

4. The effect of a stock dividend is to increase a firm's retained earnings.

T/F

5. Slowly growing companies generally have lower payout ratios than rapid growth
company.
T/F

6. An increase in which of the following is likely to increase a firm's ability to pay

dividends?

A. Liquidity
B. Access to capital markets
C. New capital requirements for expansion
D. Both A and B

7. Which of the following is the most common dividend policy?

A. Residual dividend policy?

B. Stable dividend policy
C. Constant dividend payout ratio policy
D. Regular dividends plus extras policy.

8. What generally occurs when a firm repurchases shares from existing

stockholders?
A. Earnings per share increase
B. Market price per share increases
C. Number of shares outstanding decreases
D. All of the above.

1
This study source was downloaded by 100000838971434 from CourseHero.com on 12-13-2021 07:52:36 GMT -06:00

https://www.coursehero.com/file/47655180/ANSWERS-FOR-EXERCISES-ON-TOPIC-8-1docx/
 QUESTION 1

TST company has found three acceptable investment opportunities. The three projects require a total
of $3 million in financing. It is the company’s policy to finance its investments by using 35% debt and
65% common equity. The firm has generated $2.2 million dollars from its operations that could be
used to finance the common equity portion of its investments.
a. What portion of the new investments will be financed by common equity and what portion
by debt?
b. According to the residual dividend theory, how much would be paid out in dividends?

ANSWER:
a. Common equity = .65 × $3 million = $1,950,000
Debt = .35 × $3 million = $1,050,000

b. Dividends = $2,200,000 - $1,950,000 = $250,000

QUESTION 2

DD company has a total market value of $10 million and it has 1 million shares outstanding,
then each share should sell on the open market for $10.

a. If the company then issues a 15% stock dividend, what is the number of shares
outstanding?

(15% x 1,000,000 shares) + 1,000,000 shares = 1,150,000 shares outstanding

b. What is the market value per share after the stock dividend

$10,000,000 / 1,150,000 = $8.70

2
This study source was downloaded by 100000838971434 from CourseHero.com on 12-13-2021 07:52:36 GMT -06:00

https://www.coursehero.com/file/47655180/ANSWERS-FOR-EXERCISES-ON-TOPIC-8-1docx/
 QUESTION 3

Serikandi Berhad has an equity structure as follows:

Equity Structure of Srikandi Berhad as at 30 November 2016

____________________________________________________________

Common Stock (RM 1 par, 1,000,000 shares) 1,000,000

Contributed Capital in excess of par 600,000
Retained earnings 700,000
_________
Total Common Stockholders’ Equity 2,300,000
=========

i. Srikandi Berhad has decided to pay 10 percent stock dividend direct to the
existing shareholders. The market value of the company is RM 5. What is the
changes to the new equity structure of Serikandi Berhad?

Equity Structure of Srikandi Berhad as at 30 November 2016

____________________________________________________________

Common Stock (RM1 par, 1,100,000 shares) 1,100,000

Contributed Capital in excess of par 1,000,000
Retained earnings 200,000
_________
Total Common Stockholders’ Equity 2,300,000
=========

# a total of RM500,000 is transferred from retained earnings to the other stockholders’

equity account of this RM500,000, RM100,000 is added to the common stock account
and the remaining RM400,000 is added to the Contributed Capital in Excess of Par
account.

3
This study source was downloaded by 100000838971434 from CourseHero.com on 12-13-2021 07:52:36 GMT -06:00

https://www.coursehero.com/file/47655180/ANSWERS-FOR-EXERCISES-ON-TOPIC-8-1docx/
 ii. If the company decided to split the shares 2:1, what is the new structure of
equity of Srikandi Berhad?

Equity Structure of Srikandi Berhad as at 30 November 2016

____________________________________________________________

Common Stock (RM0.50 par, 2,000,000 shares) 1,000,000

Contributed Capital in excess of par 600,000
Retained earnings 700,000
_________
Total Common Stockholders’ Equity 2,300,000
=========

QUESTION 4

Trevor Co.’s future earnings for the next four years are predicted below. Assuming there are 500,000
shares outstanding, what will the yearly dividend per share be if the dividend policy is as follows?
a. A constant payout ratio of 40%
b. Stable dollar dividend targeted at 40% of the average earnings over the four-year period
c. Small, regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding $1
million
Trevor Co.
Year 1 $ 900,000
Year 2 $1,200,000
Year 3 $850,000
Year 4 $1,350,000

ANSWER:
a. .40($900,000)/500,000 = $0.72
.40($1,200,000)/500,000 = $0.96
.40($850,000)/500,000 = $0.68
.40($1,350,000)/500,000 = $1.08

b. .40($1,075,000) = $430,000/500,000 = $0.86

c. Year 1 $0.75 = $0.75

Year 2 $0.75 + $0.16 = $0.91
Year 3 $0.75 = $0.75
Year 4 $0.75 + $0.28 = $1.03

4
This study source was downloaded by 100000838971434 from CourseHero.com on 12-13-2021 07:52:36 GMT -06:00

https://www.coursehero.com/file/47655180/ANSWERS-FOR-EXERCISES-ON-TOPIC-8-1docx/
 QUESTION 5

Mario's has 18,000 shares of stock outstanding with a par value of $1 per share and a market
price of $4 a share. The balance sheet shows $18,000 in the common stock account, $336,000
in the paid in surplus account, and $64,000 in the retained earnings account. The firm just
announced a 5-for-1 stock split.

a. What will the paid in surplus account value be after the split?

b. What will the price be after the split?

ANSWERS

a. $336,000

b. $4/(5/1) = $0.80

QUESTION 6

The Peanut Shack has 6,000 shares of stock outstanding with a par value of $1 per share. The
current market value of the firm is $145,600. The company just announced a 3-for-2 stock
split.

(a) What will the market price per share be after the split?

(b) How many shares of stock will be outstanding after the split?

ANSWERS

a. Current Market price = $145,600/6,000

= $24.27

Market price after 3-for-2 stock split = $24.27 /(3/2)

= $16.18

b. Number of shares = 6,000 (3/2)

= 9,000 shares

5
This study source was downloaded by 100000838971434 from CourseHero.com on 12-13-2021 07:52:36 GMT -06:00

https://www.coursehero.com/file/47655180/ANSWERS-FOR-EXERCISES-ON-TOPIC-8-1docx/
 QUESTION 7

Miya, a single investor owns 1000 shares of Advance C-Synergy (ACS), common stock. She
originally bought the stock two years ago at initial public offering (IPO) price at RM5 per
share. The stock of this fast growing technology company is currently trading for RM21 per
share, so the current value of her advance ACS stock is RM21,000 (RM21 x 1000). Because
the firm’s board of director believe that the stock would trade more actively in the RM 7 to
RM8 price range, it just announced a 3-for-1 stock split.

a) Compare the total value of Miya’s stock holding before and after the stock split.

# of existing shares shares = 1000

# of shares after split = 1000 x 3 = 3000
1
Current price = $21
Price after split = 21 x 1 = $7
3
Value of Miya’s stock
Before split = 1000 x $21 = 21,000
After split = 3000 x 7 = 21,000

There is no change on the total value of Miya’s stock because stock price will reduce with the
increase of # of shares.

b) If the analyst believe that the price will fall 25% from the initial price after the split,
does Miya experience any gain or loss on the stock?

New price after 25% fall = $21 x (1 - .25) = 15.75

# shares after split = 3000
Value after split & price fall = 3000 x 15.75 =$ 47,250
Value before split = 21,000

Miya will experience a gain on the stock = 47250 – 21000 = $26250

6
This study source was downloaded by 100000838971434 from CourseHero.com on 12-13-2021 07:52:36 GMT -06:00

https://www.coursehero.com/file/47655180/ANSWERS-FOR-EXERCISES-ON-TOPIC-8-1docx/
 QUESTION 8

a) Omar currently holds 800 shares of LutriGen Berhad. The company has 80,000 shares
outstanding. The recent earning available for common stockholders is RM160,000 and its
stock is currently selling at RM44 per share. LutriGen intends to retain its earnings and pay
10% stock dividend.

i) Calculate the LutriGen’s earning per share.

EPS=RM160,000/80,000 = RM 2.00

ii) What proportion of the company does Omar currently own?

800shares/80,000shares= 1%

iii) Calculate the total number of shares that Omar will have after the stock dividend.

Stock dividend= 800 share x1.10 = 880 shares

iv) What will be the market price for LutriGen after the stock dividend.

RM44/1.10= RM40 per share

b) Manis Berhad is planning to pay dividends of RM550,000. There are 275,000

shares outstanding with an earnings per share of RM6. The share should sell for RM45 after
the ex- dividend date. Instead of paying dividend, management decides to repurchase stocks.

i) What should be the repurchase price?

Proposed Dividend Per share= RM550,000/275,000 =RM2.00

Repurchased price = ex dividend market price + proposed div per share

Repurchased price =RM45 + RM2 = RM47

ii) How many shares should be repurchased?

Number of shares repurchased = RM550,000 ÷ RM47= 11,702 shares

7
This study source was downloaded by 100000838971434 from CourseHero.com on 12-13-2021 07:52:36 GMT -06:00

https://www.coursehero.com/file/47655180/ANSWERS-FOR-EXERCISES-ON-TOPIC-8-1docx/
Powered by TCPDF (www.tcpdf.org)