680 LCG} PART SIX. Long-Term Fir 14-5 PROBLEMS P44 P14-2 year __EPS_ividend/share 2016 S175 2017198 2018 2.05 219 (22S Based on Kops historical dividend payout ratio, discuss whether a constan 5, ratio of 60% would benefit shareholders. Legal & General, with the equity account as described in E14-3, announces i. 8 ply to issue an additional $8,710 shares of common stock as part of its stock di. day plan, The current market price of Legal 8¢ General is £2.69 per share. Show hw proposed dividend would affect the stockholder’s equity account. Select problems are available in MyLab Finance. The sni:s icon indicates problems in Excel format available in MyLab Finance. Dividend payment procedures At the quarterly dividend meeting, Perfect Frame Manufacturing declared $2.00 per share dividend for the holders on record on Monday, March 10. The outstanding common stock is 250,000 shares. The diver! Payment date was set as Monday, March 31. Prior to the dividend declaration, the firm's key accounts were as follows: Cash $650,000 Dividends payable so Retained earnings $2,000,000 a, When is the ex dividend date? b. Calculate the amount of dividend payable on March 31, c. What values would the ke s Y accounts have after the March 31 payment date d. All other things being equal, what will happen to the stock price on the ex ditt dend date? e. What is the net effect of di leclaring and paying divid the total ase of Perfect Frame Manufactu Paying dividends on the to ring? Personal Finance Problem Dividend payment Sandra Gray owns 800 shares of Steel & Fittings Corpo" Qi the annual dividend meeting, a cash dividend of $1.08 wos declared tote 1!" September 30 to all the holders of record as at September 9. A scanned with CamscannerCHAPTER 14 Payout Policy 681 a WI ke ae the amount of the dividend Sandra would receive on September 30? amount of ae ber stockholding to 900 shares on September 10, what isthe ce Whar nit the dividend she would receive on September 30? Ti Sanden ct does declaring this dividend have on stock prices on September 7? amar sold 200 shares for a total of $1,000 on September 15, what is the ‘mount of the dividend she would receive on September 30? @ 14-3 Reidel dividend poticy A new intern is trying to understand the dividend policy of The Fei, Having studied dividend policies at university, the intern wonders why « firm chose its current dividend policy. The intern also wants to know how to estimate the dividend amount that you are likely to pay next year. You may not ave all the information for the intern, but you do know the following: (1) The firm follows a residual dividend policy. (2) The total capital budget for next year is dependent on the outcome of a feasibil- ity study, and will either be $1.5 million, $2.5 million, or $3.5 million. (3) The forecasted level of potential retained earnings for next year is $2.2 million (4) The firm wants to maintain a debt ratio of 60%. a. Describe the purpose of a residual dividend policy. 'b. Calculate the expected amount of the dividend, if any, for each of the three capital budget amounts. € Explain why there are differences in the amounts of the dividend for the three capital budget amounts. P14-4 Dividend constraints Plastic Enterprises’ stockholders’ equity account is as follows: ‘Common stock (280,000 shares at $3.50 par) $980,000 id-in capital in excess of par $900,000 ed earnings $1,200,000 Total stockholders’ equity The earnings available for the common stockholders are $280,000 and are included as part of the $1,200,000 retained earnings. a. Calculate the maximum dividend per share that the firm can pay if the legal capital includes all paid-in capital. b. Calculate the maximum dividend per share that the firm can pay if the legal capital includes only the valye of the common stock. c. If Plastic Enterprises has $25,000 in cash, what is the largest per-share dividend it can pay without borrowing, assuming legal capital includes all paid-in capital? d. What is the purpose of capital impairment restrictions when developing a dividend policy? & 14-5 Dividend constraints A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year's earnings), and 25,000 shares of common stock Scanned with CamScanner682 PART SIX. Long-Term Financial Decisions 14-6 P147 ding. ln the current year, it has $29,000 of earnings available fr the cop, outstanding. In the cu ° mon stockholders. a, What is the most the firm holder? (Assume that legal b. What effect would a cash d sheet entries? c. If the firm cannot raise any new sider the key constraint with respect ‘ments? Why? can pay in cash dividends to each common stock | capital includes all paid-in capital.) vidend of $0.80 per share have on the firms bln, funds from external sources, what do you con to the magnitude of the firm’s dividend Low-regular-and-extra dividend policy Cromwall Laboratories has a target poyou, ratio of 60%. However, the board realizes that adhering strictly to the payout rag will cause the dividend payout to fluctuate. Therefore, the board has declared » ular dividend of $0.75 per share per year while paying extra cash dividends i und, are available, Earnings per share for the period 2015 to 2020 are shown in the following table. Calculate the payout ratio for each year on the basis of the regular dividend pu ment and the EPS given. b. For each year, what is the difference between the regular $0.75 dividend and a 60% payout? © Cromwall Laboratories decides to pay an extra dividend of $0.50 in years when the difference between the regular $0.75 dividend and the 60% payout is atlas $0.70. Indicate the dividend payments and “extra” dividend payments, ifany, for each year. 4d. The company estimates future earnings per share will remain above $3.20 pet share for most years. If the board wants to increase the regular dividend from $0.75 to $1.25, what factors should it consider before implementing the new ular dividend? Alternative dividend policies Over the Past 10 years, a firm has had the earnings share shown in the following table. Year Earnings per share 2014 $2.40 2013 1.20 2012 1.80 2011 0.50 2010 02s scanned with Camscannerys) P1428 p14-9 NN CHAPTER 14 Payout Policy 683 a. If the 7 «firm's dividend policy were based on a constant payout ratio of 40% for all years with posit Positive earnii 3 dividend foreach year) ings and 0% otherwise, what would be the annual b. Ifthe firm had a dividi share whenever what annual di If the firm’s poli Per share excee $3.00 would d. Discuss the pr lend payout of $1.00 per share, increasing by $0.10 per the dividend payout fell below 50% for 2 consecutive years, idend would the firm pay each year? icy were to pay $0.50 per share each period except when earnings d $3.00, when an extra dividend equal to 80% of earnings beyond be paid, what annual dividend would the firm pay each year? os and cons of each dividend policy described in parts a through c. aa dividend policies Steel Enterprises’ earnings per share for the period eaeng20 ate summarized in the table below. Use this information to calculate the vidends per share for each of the years and scenarios presented in parts a through d. Year 2020 2019 2018 2017 2016 2o1s 2014 2013 a. For positive earnings only, pay out 40% of earnings. b. Pay $0.75 per share and increase to $0.85 per share when earnings per share ‘exceed $1.60 per share. . ‘c. Pay $0.75 per share and pay an extra dividend of $0.50 per share when the earn- ings per share exceed $1.60. 4d. Pay $0.75 per share and pay an extra dividend of 50% of earnings above $1.50 per share. ¢. Compare each of the dividend policies described in parts a through d. Stock dividend: Firm The stockholders’ equity account for Paper Manufacturers is Shown below. The firm's common stock has a current market price of $20 per share. Preferred stock $100,000 Common stock (120,000 shares at $4 par) $480,000 Paid-in capital in excess of par $1,920,000 Retained earnings $360,000 Total stockholders’ equity $2,860,000 a, How will the stockholders’ equity account change if Paper Manufacturers pays a '$% stock dividend? b. How will the stockholders’ equity account change if Paper Manufacturers pays (1) 2 10%, and (2) a 15% stock dividend? «c. What are the effects of stock dividends on stockholders’ equity? Scanned with CamScanner684 (ys) Ge oo PART SIX. Long-Term Financial Decisions P1410 Piatt P1412 cS och wear company, has the fo .d- Luxottica, an Italian eye : eae aroma ‘The firm's common stock currently sells for €49 ca, stockholders’ equity ac €1,000,000 d stock ; cane eae (100,000 shares at €20 par) __€2,000,000 €5,000,00 Paid-in capital in excess of par one oa Retained earnings itso. Total stockholders’ equity €8,850,000 a. Show the effects on the firm of a cash dividend of €0.1, €0.5, €1.0, and ¢2.5 share. b. Show the effects on the firm of a 1%, 5%, 10% and 20% stock dividend € Compare the effects in parts a and b. What are the most significant differences between the two methods of paying dividends? Personal Finance Problem Stock dividend: Investor John McKay holds 500 common shares of Smart Life Corporation. The corporation has 0,000 shares outstanding. The current price Per share is $25. Smart Life Corporation has reported earnings available to com, mon stockholders of $220,000. The firm intends to retain its earnings and pay 4 10% stock dividend, a, Calculate the current earnings per share. b. What is John’s percentage of ownership of Smart Life Corporation before the stock dividend? ‘What is John’s percentage of ownership of Smart Life Corporation after the stock dividend? ‘What do you expect the market price of the stock to be after the stock dividend? Personal Finance Problem Stock dividend: lavestor Security Data Company has outstanding 50,000 shares of common stock currently selling at $40 per share. The firm most recently hed earnings available for common stockholders of $120,000, but it has decided to retain these funds and is consides ting either a 5% or a 10% stock dividend in lew of a cash dividend. a 'b. If Sam Waller currently owns 504 tly and under each of the proposed stock dividend plans. Explain your findings, ¢ Calculate and explain the market price per share under each of the stock divi dend plans. 4. For each of the proposed stock dividends, calculate the earni share after payment of the stock dividend, oa What isthe ‘alue of Sam's holdings under each ofthe plans? Explain. ‘ould Sam have any preference with res} he prog k dividends? aa Fespect to the proposed stoc scanned with Camscanner9 P1413, © Paid & P1445, CHAPTER 14 Payout Policy 685 Stock i: split Firm “The stockholders’ equity account of Paper Weight Company is as follows: Preferred stock ij $300,000 Comsea stock (200,000 shares at $5 par) $1,000,000 'aid-in capital in excess of par $500,000 Retained earnings $820,000 Total stockholders’ equity ‘$2,620,000 {ow will the stockholders’ equity account change if Paper Weight Company leclares a 2-for-1 stock split? How will the stockholders’ equity account change if Paper Weight Company declares a I-for-2 reverse stock split? § Indicate the change, i any, expected if the frm declare a 3-fo-1 stock split. |. How will the stockholders’ equity account change if Paper Weight Company declares a 1-for-4 reverse stock split? €. Discuss your observations based on your answers in parts a tod. Personal Finance Problem Stock splits Brembo, an Italian automotive braking-systems supplier, announced that it was going to split the stock 5-for-1. Brambilla Fumagalli owns 100 shares of the company, which he had purchased for €40 per share years ago. Just before the stock split, Brembo's shares were trading for €64. Answer the following questions about the impact of the stock split on Brambil- la’s holdings and taxes. He is in the 23% tax bracket. a. How many shares of Brembo will Brambilla own after the stock split? b. Immediately after the split, what do you expect the value of Brembo to be? . Compare the total value of Brambilla’s stock holdings before and after the split, given that the price of Brembo stock immediately after the split was €12.8. What do you find? 4d. Does Brambilla experience a gain oF loss on the stock as a result of the S-for-I split? ‘e. What is Brambilla’s tax liability from the event? Stock split versus stock dividend Distilled Water Corporation is a company special- izing in water purification and distributing bortled water to retailers. The corpora- tion is considering a 3-for-2 stock split. The current stock price is $25 per share. The stockholders’ equity account is as follow Preferred stock $500,000 Common stock (150,000 shares at $6 par) $900,000 Paid-in capital in excess of par $2,850,000 Retained earnings $760,000 Total stockholders’ equity (010,000 What changes will occur in the stockholders’ equity account from the 3-for-2 stock split? bb, What change would you expect in the stock price as a result of the stock split? Caleulate the maximum cash dividend per share that the firm could pay on com: non stock before and after the stock split, assuming that legal capital includes all paid-in capital. © Scanned with CamScanner686 PART SIX Long-Term Financial Decisions soo sare. Based on the maximum dividends payable gg A stockholder ein kholder prefer the 3-for-2 stock split? part c), would the stock! ane ¢. Differentiate between stoc splits Firm The board of Diamantis Masoutis $,4, f shares, and making the price more appeal, 30% stock dividend of a 2-for-1 stock spiy dl other per-share information are as fllo.y P14-16 Stock dividend versus stock split: considering increasing the number 0 to investors, It is considering either a Currently the firm’s equity account an €100,000 Preferred stock gn Common stock ($0,000 shares at €2 par) €100,000 Paid-in capital in excess of par S00 Retained earnings £300,000 Total stockholders’ equity €900,000 Price per share € Nn 5.00 Earnings per share oa Dividend per share “ a. Show the effect on the equity accounts and per-share data of a 30% stock dividend, b. Show the effect on the equity accounts and per-share data of a 2-for-1 stock spi. ¢. Which option is going to accomplish Masoutis" goal of reducing the current stock price while maintaining a stable level of retained earnings? 4d. What legal constraints might encourage the firm to choose a stock split over a stock dividend? Lc} P14-17 Stock Repurchase The following data are available on Volkswagen AG as of December 22, 2017: Earnings available to stockholders €3,631,450,000 Number of shares of common stock outstanding 295,000,000 Earnings per share €12.31 Market price per share €170.19 Price/Earnings ratio (P/E) 13.82 The firm's board is currently considerin ings to pay cash dividends of €1 per sh: a. Calculate the approximate number Per share price, using the funds th 'g whether it should use €295,000,000 of its eam are OF to repurchase stock at €170.20 per share. r of shares the firm can repurchase at the €170.20 lat would h: idend, b. What is the EPS after the repurchase? Explain yourcalesacnen nies ¢. If the stock still sells at 13.82 times earnings, what will the market rice be afte the repurchase? 4. Compare the pre-and post-r. €. Compare the stockholders’ tives, What are the tax imp! fepurchase earnings per share, Positions under the dividend and repurchase altem2 lications under each alternative? P14-18 one of the world’s ilding materials companies is concerned about preservi teh ichrriat: ing the wealth of its stockholders during 2 6! Scanned with CamScanner