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Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
a.
46.71%
b.
60.97%
c.
36.88%
d.
44.26%
e.
49.17%
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
40%
Net income (NI)
$7,500
a.
46.80%
b.
30.00%
c.
43.20%
d.
32.00%
e.
40.00%
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
66. Ross-Jordan Financial has suffered losses in recent years, and its stock currently sells for only $0.60 per share.
Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $12 per share.
How many of the old shares must be given up for one new share to achieve the $12 price, assuming this transaction has no
effect on total market value?
a.
18.00
b.
20.80
c.
16.20
d.
20.00
e.
15.60
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
67. Keys Financial has done extremely well in recent years, and its stock now sells for $65 per share. Management wants
to get the price down to a more typical level, which it thinks is $40.00 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.
1.54
b.
1.30
c.
1.63
d.
1.46
e.
2.11
68. Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $75 per share. If the
firm's total market value increased by 6% as a result of increased liquidity and favorable signaling effects, what was the
stock price following the split?
a.
$19.28
b.
$16.10
c.
$16.89
d.
$19.88
e.
$21.86
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
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
$4,500,000
Net income (NI)
$5,000,000
% Debt now
15%
% Debt after change
68%
a.
$2,957,400
b.
$2,718,900
c.
$1,860,300
d.
$2,385,000
e.
$1,955,700
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
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
$5,000,000
Net income (NI)
$5,500,000
% Debt now
15%
% Debt after change
80%
a.
68.5%
b.
60.9%
c.
60.3%
d.
63.8%
e.
59.1%
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
$1,900,000
Net income
$3,500,000
% Debt
30%
a.
$521,700
b.
$404,200
c.
$493,500
d.
$484,100
e.
$470,000
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
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 $1,150,000. If the company follows the residual dividend model, how much dividends will it pay
or, alternatively, how much new stock must it issue?
a.
$00; $50,000
b.
$42,500; $39,500
c.
$52,500; $50,500
d.
$40,500; $48,500
e.
$52,500; $56,000
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
73. Grullon Co. is considering a 7-for-3 stock split. The current stock price is $97.50 per share, and the firm believes that
its total market value would increase by 7% as a result of the improved liquidity that should follow the split. What is the
stock's expected price following the split?
a.
$42.92
b.
$53.65
c.
$49.63
d.
$44.71
e.
$38.00
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
41%
% Equity = 1.0 – % Debt
59%
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
$2,950,000
Dividends paid = NI – Equity needed
$550,000
Currently projected dividend payout ratio
84.3%
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
Target dividend payout ratio
75%
a.
-$3,516,949
b.
-$4,044,492
c.
-$3,727,966
d.
-$4,079,661
e.
-$2,919,068
75. Sheehan Corp. is forecasting an EPS of $5.00 for the coming year on its 500,000 outstanding shares of stock. Its
capital budget is forecasted at $700,000, and it is committed to maintaining a $4.00 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.
23.14%
b.
35.43%
c.
31.43%
d.
29.43%
e.
28.57%
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
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 debt
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?
Policy Changes
Current policy
Increase debt
Lower payout
Do both
Projected NI
$237.5
$237.5
$237.5
$237.5
% 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.
221.7; 142.5; 649.2
b.
277.1; 129.7; 525.8
c.
166.3; 146.8; 506.4
d.
219.5; 172.4; 616.7
e.
268.2; 108.3; 694.6
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
