Chapter 14: Distributions to Shareholders: Dividends and Share Repurchases
58.
Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income
is $550,000, and its board of directors has decreed that no new stock can be issued during the coming year. If the
firm follows the residual dividend model, what is the maximum capital budget that is consistent with maintaining
the
target capital structure?
a. $673,652
b. $709,107
c. $746,429
d. $785,714
e. $825,000
59.
Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend model
and also maintains its target capital structure, what will its dividend payout ratio be?
EBIT
$2,000,00
Capital budget
$850,000
Interest rate
10%
% Debt
40%
Debt outstanding
$5,000,00
% Equity
60%
Shares outstanding
5,000,000
Tax rate
40%
a. 37.2%
b. 39.1%
c. 41.2%
d. 43.3%
e. 45.5%
60.
Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target
capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company
follows the residual dividend model, how much in dividends, if any, will it pay?
a. $45,125
b. $47,500
c. $50,000
d. $52,500
e. $55,125
61.
Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will
it pay out?
Capital budget
$1,000,00
% Debt
60%
Net income (NI)
$625,000
a. $183,264
b. $192,909
c. $203,063
d. $213,750
e. $225,000
62.
NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any,
will it pay out?
Capital budget
$1,500,000
% Debt
65%
Net income (NI)
$550,000
a. $20,363
b. $21,434
c. $22,563
d. $23,750
e. $25,000
63.
Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will
its dividend payout ratio be?
Capital budget
$5,000
% Debt
45%
Net income (NI)
$5,300
a. 48.11%
b. 50.52%
c. 55.57%
d. 61.13%
e. 67.24%
64.
LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what
will its dividend payout ratio be?
Capital budget
$5,000
% Debt
45%
Net income (NI)
$7,000
a. 60.71%
b. 63.75%
c. 70.13%
d. 77.14%
e. 84.85%
65.
New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its
forecasted dividend payout ratio?
Capital budget
$7,500
% Debt
35%
Net income (NI)
$6,500
a. 18.23%
b. 20.25%
c. 22.50%
d. 25.00%
e. 27.50%
66.
Ross-Jordan Financial has suffered losses in recent years, and its stock currently sells for only $0.50 per share.
Management wants to use a reverse split to get the price up to a more “reasonable” level, which it thinks is $25
per share. How many of the old shares must be given up for one new share to achieve the $25 price, assuming this
transaction has no effect on total market value?
a. 47.50
b. 49.88
c. 50.00
d. 52.50
e. 55.13
67.
Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management
wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be
required to get to this price, assuming the transaction has no effect on the total market value? Put another way,
how many new shares should be given per one old share?
a. 6.98
b. 7.00
c. 7.35
d. 7.72
e. 8.10
68.
Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the
firm’s total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what
was the stock price following the split?
a. $29.93
b. $31.50
c. $33.08
d. $34.73
e. $36.47
69.
Clark Farms Inc. has the following data, and it follows the residual dividend model. Currently, it finances with
15% debt. Some Clark family members would like for the dividends to be increased. If Clark increased its debt
ratio, which the firm’s treasurer thinks is feasible, by how much could the dividend be increased, holding other
things constant?
Capital budget
$3,000,000
Net income (NI)
$3,500,000
% Debt now
15%
% Debt after change
60%
a. $1,093,500
b. $1,215,000
c. $1,350,000
d. $1,485,000
e. $1,633,500
70.
Purcell Farms Inc. has the following data, and it follows the residual dividend model. Currently, it finances with
15% debt. Some Purcell family members would like for the dividend payout ratio to be increased. If Purcell
increased its debt ratio, which the firm’s treasurer thinks is feasible, by how much could the dividend payout ratio
be increased, holding other things constant?
Capital budget
$3,000,000
Net income (NI)
$3,500,000
% Debt now
15%
% Debt after change
60%
a. 38.6%
b. 40.5%
c. 42.5%
d. 44.7%
e. 46.9%
71.
Whitman Antique Cars Inc. has the following data, and it follows the residual dividend model. Some Whitman
family members would like more dividends, and they also think that the firm’s capital budget includes too many
projects whose NPVs are close to zero. If Whitman reduced its capital budget to the indicated level, by how much
could dividends be increased, holding other things constant?
Original capital budget
$3,000,000
New capital budget
$2,000,000
Net income
$3,500,000
% Debt
40%
a. $486,000
b. $540,000
c. $600,000
d. $660,000
e. $726,000
72.
Pavlin Corp.’s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and
its forecasted net income is $900,000. If the company follows the residual dividend model, how much dividends
will it pay or, alternatively, how much new stock must it issue?
a. $462,983; $244,352
b. $487,350; $257,213
c. $513,000; $270,750
d. $540,000; $285,000
e. $ 0; $300,000
73.
Grullon Co. is considering a 7-for-3 stock split. The current stock price is $75.00 per share, and the firm believes
that its total market value would increase by 5% as a result of the improved liquidity that should follow the split.
What is the stock’s expected price following the split?
a. $32.06
b. $33.75
c. $35.44
d. $37.21
e. $39.07
74.
Walter Industries is a family owned concern. It has been using the residual dividend model, but family members
who hold a majority of the stock want more cash dividends, even if that means a slower future growth rate.
Neither the net income nor the capital structure will change during the coming year as a result of a dividend policy
change to the indicated target payout ratio. By how much would the capital budget have to be cut to enable the
firm to achieve the new target dividend payout ratio?
% Debt 35%
% Equity = 1.0 − % Debt 65%
Capital budget under the residual dividend model $5,000,000
Net income; it will not change this year even if dividends increase $3,500,000
Equity to support the capital budget = % Equity × Capital budget $3,250,000
Dividends paid = NI − Equity needed $250,000
Currently projected dividend payout ratio 7.1%
Target dividend payout ratio 70.0%
a. −$2,741,538
b. −$3,046,154
c. −$3,384,615
d. −$3,723,077
e. −$4,095,385
75.
Sheehan Corp. is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its
capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend per share. It finances
with debt and common equity, but it wants to avoid issuing any new common stock during the coming year.
Given these constraints, what percentage of the capital budget must be financed with debt?
a. 30.54%
b. 32.15%
c. 33.84%
d. 35.63%
e. 37.50%
76.
Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without
issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable
future. Your boss, the CFO, wants to know how the capital budget would be affected by changes in capital
structure policy and/or the target dividend payout policy. You obtained the following data, which shows the firm’s
projected net income (NI), its current capital structure and dividend payout policies, and three possible new
policies. Projected net income for the coming year will not be affected by a policy change. How much larger
could the capital budget be if (1) the target de ratio were raised to the indicated amount, other things held
constant, (2) the target payout ratio were lowered to the indicated amount, other things held constant, or (3) the
debt ratio and dividend payout were both changed by the indicated amounts?
Current Policy Changes
Policy Increase Debt Lower Payout Do Both
Projected NI $175.0 $175.0 $175.0 $175.0
% Debt 25.0% 75.0% 25.0% 75.0%
% Equity 75.0% 25.0% 75.0% 25.0%
% Payout 65.0% 65.0% 20.0% 20.0%
a. $133.0; $ 85.5; $389.6
b. $140.0; $ 90.0; $410.1
c. $147.4; $ 94.8; $431.7
d. $155.2; $ 99.8; $454.4
e. $163.3; $105.0; $478.3