Chapter 15: Dividend Policy
59. Heintz Corp. has just declared a 10% stock dividend. The company’s pre-stock dividend common
stockholders’ equity was as follows:
Common stock ($0.50 par, 10,000,000 shares)
$ 5,000,000
Contributed capital in excess of par
$ 48,000,000
Retained earnings
$ 97,500,000
Total common stockholders’ equity
$150,500,000
If the common stock of Heintz was selling at $32 a share prior to the stock dividend, what will the retained
earnings be after the stock dividend is distributed?
a. $65,500,000
b. $118,500,000
c. $66,000,000
d. $97,500,000
60. Sorsi has declared a 15% stock dividend. If the stock was selling for $34 before the ex-dividend date, what
should its price be on the ex-dividend date?
a. $34.00
b. $29.57
c. $28.90
d. $30.91
61. Haulsee Inc. paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase
in the quarterly dividend to $0.14. What is the effective rate of the dividend increase?
a. 26.7%
b. 18.3%
c. 28.3%
d. 15.7%
Chapter 15: Dividend Policy
62. Badger Tool and Die Company has 100,000 shares outstanding and plans to pay $1.00 per share in dividends
each quarter next year. Badger has a capital budget of $700,000 for next year and plans to maintain its present
debt ratio of 0.30. If earnings are expected to be $7.20 per share, how much external equity must Badger raise?
a. $210,000
b. $490,000
c. $170,000
d. none
63. Cycle Out has 1,000,000 shares outstanding and currently has annual earnings per share of $5.20. If Cycle’s
stock price is $62.40, what would be the expected stock price if Cycle repurchases 50,000 shares?
a. $65.52
b. $65.68
c. $75.72
d. Cannot be determined from the information provided
64. Cafe de Oro earns $4.25 per share and has a dividend payout ratio of 0.40. If Cafe de Oro has a capital budget
of $200,000 and 70,000 shares outstanding, what are the annual dividends per share?
a. $1.70
b. $1.39
c. $2.55
d. $4.00
65. The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000.
If Altern Music raises all of its funds internally and follows the “passive residual policy”, what are the annual
dividends per share?
a. $1.70
b. $1.39
c. $2.55
d. $2.81
Chapter 15: Dividend Policy
66. WPI Inc. has the following current equity accounts on its balance sheet:
Common stock ($2.50 par, 500,000 shares)
$ 1,250,000
Contributed capital in excess of par
$10,000,000
Retained earnings
$15,540,000
Total
$26,790,000
If WPI earned $3.20 per share this year, what is the maximum dividend per share that WPI may pay if the state
capital impairment provisions are limited to the par value and the contributed capital in excess of par accounts?
a. $3.20
b. $31.08
c. $34.28
d. $15.54
67. Nova earned $7.20 per share and maintains a stable payout ratio of 60 percent. Nova has 1,000,000 shares
outstanding and a capital budget of $5 million. If Nova maintains a debt ratio of 0.50, what were the dividends
per share?
a. $4.32
b. $2.88
c. $2.20
d. cannot be determined from the information provided
68. Excelsior Company’s capital structure is as follows:
Common stock ($2 par value, 2,000,000 shares)
$ 4,000,000
Contributed capital in excess of par
16,000,000
Retained earnings
23,000,000
Total common stockholders’ equity
$43,000,000
The current market price of the firm’s common stock is $30. If the firm declares a 10% stock dividend,
determine the balance in the contributed capital in excess of par and retained earnings accounts.
a. $22,000,000; $17,000,000
b. $21,600,000; $17,000,000
c. $21,600,000; $23,000,000
d. $17,000,000; $21,600,000
Chapter 15: Dividend Policy
69. Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50 respectively next
year. Peterson currently has 5,000,000 shares of common stock outstanding. The company’s capital budget for
next year is projected to be $25,000,000. Peterson plans to maintain its present debt ratio (debt to total assets)
at 40% next year. (Assume that Peterson’s capital structure includes only common equity and debt and that
these will be the only sources of funds to finance capital budgeting projects next year.) Determine how much
external equity the company must raise to finance its capital budget.
a. $15,000,000
b. 0
c. $5,000,000
d. cannot be determined
70. Kaneb Services, Inc. has just declared a 3 for 2 stock split. The company’s pre–split common stockholders’
equity was as follows:
Common stock($1.25 par, 2,000,000 shares)
Contributed capital in excess of par
Retained earnings
Total common stockholders’ equity
If the pre-split price of common stock was $42, what will be the amount of retained earnings after the split?
a. $140,100,000
b. $139,200,000
c. $182,100,000
d. $141,350,000
71. Kaneb Services, Inc. has just declared a 3 for 2 stock split. If the pre-split price of common stock was $42 a
share, what will be the post-split price per share (assuming no other changes occur)?
a. $31.50
b. $26.25
c. $25.15
d. $28.00
Chapter 15: Dividend Policy
72. The Barden Corporation has the following equity accounts on its balance sheet:
Common Stock ($1.25 par, 3,000,000 shares)
$ 3,750,000
Contributed capital in excess of par
24,250,000
Retained earnings
153,600,000
Total common stockholders’ equity
$181,600,000
What is the maximum amount of dividends per share that may be paid by the Barden Corp. if the capital
impairment provisions of state law are limited to the par value and the capital in excess of par accounts?
a. $59.28
b. $51.20
c. $60.53
d. $8.08
73. Interim Systems has 1.5 million shares outstanding. This year Interim will have operating income (EBIT) of
$18.2 million, interest expenses of $2.4 million, depreciation expenses of $3.1 million. What will the dividend
per share be if Interim’s dividend payout ratio is 40%? Assume a marginal tax rate of 40%.
a. $2.53
b. $3.39
c. $2.03
d. $6.32
74. Zycad has operating earnings (EBIT) of $8.6 million and annual interest expenses are $1.5 million. Zycad
wishes to maintain its annual dividend of $1.00 per share on the 1,900,000 shares outstanding. The firm has a
bond issue outstanding that requires the retirement of $3 million (face value) of the issue each year through
purchases of the bonds in the market. What is the maximum dividend per share that may be paid if the current
market price of the bonds is $85? Assume the marginal tax rate is 40% and that earnings are the only source of
funds that can be used to pay the dividend and retire the bonds.
a. $0.66
b. $0.16
c. $1.37
d. $0.90
Chapter 15: Dividend Policy
75. Omega Sports has the following equity accounts on its balance sheet:
Common stock ($0.50 par, 900,000 shares)
$ 450,000
Contributed capital in excess of par
5,580,000
Retained earnings
21,204,000
Total common stockholders’ equity
$27,234,000
The current market price of the firm’s shares is $20. If the firm declares a 10 percent stock dividend and a cash
dividend of $0.10 per share, the retained earning account would change to .
a. $21,060,000
b. $19,305,000
c. $25,335,000
d. $19,404,000
76. Zimmer Corp. has just declared a 5 for 4 stock split. If the pre-split price of common stock was $36 a share,
what will be the post-split price per share (assuming no other changes occur)?
a. $30.00
b. $27,00
c. $28.80
d. $32.00
77. Leigh Fibers has 6 million shares outstanding. This year Leigh will have operating income (EBIT) of $36.4
million, interest expenses of $5.8 million, and depreciation expenses of $6.2 million. What will be Leigh’s
dividend per share if the company has a payout ratio of 30%? Assume a marginal tax rate of 40%.
a. $0.92
b. $0.73
c. $1.09
d. $0.61
Chapter 15: Dividend Policy
78. If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of
$6.8 million, what is Sulzer’s dividend payout ratio, given that the dividend per share is $0.80? Assume a
marginal tax rate of 40%.
a. 56.3%
b. 31.5%
c. 50.4%
d. 37.5%
79. Wrenn Corp. has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses
of $3.7 million. What is Wrenn’s operating income if the dividend per share is $0.80 and the dividend payout
ratio is 35%? Assume a marginal tax rate of 40%.
a. $15.89 million
b. $25.73 million
c. $21.33 million
d. $29.43 million
80. Metromat has the following equity accounts on its balance sheet:
Common stock ($2 par, 2.4 million shares)
$ 4,800,000
Contributed capital in excess of par
33,600,000
Retained earnings
134,400,000
Total common stockholders’ equity
$172,800,000
The current market price of Metromat’s shares is $16. If the firm declares a 15% stock dividend and a $0.15
per share cash dividend, what will be the impact on contributed capital in excess of par? Assume a marginal tax
rate of 40%.
a. decreases $2.56 million
b. increases $5.04 million
c. increases $5.76 million
d. does not change
Chapter 15: Dividend Policy
81. Sadaplast has just declared a 25 percent stock dividend. The annual dividend, before the stock dividend was
declared, was $1.00. Sadaplast intends to pay a dividend of $1.05 per share after the stock dividend is paid.
What is the percentage increase in the cash dividend that will accompany the stock dividend?
a. 6.25%
b. 26.25%
c. 31.25%
d. 5.00%
82. Urguhart has just declared a 4 for 3 stock split. If the pre-split price of common stock was $54 a share, what do
you expect the post-split price will be?
a. $72.00
b. $36.18
c. $42.23
d. $40.50
83. Concin has the following equity accounts on its balance sheet:
Common stock ($0.25 par, 9 million shares)
$ 2,250,000
Contributed capital in excess of par
89,400,000
Retain earnings
67,503,189
$159,153,189
The current market price for a share of Concin’s stock is $24.25. If the firm declares a 10% stock dividend and
a $0.06 per share cash dividend, what will be the impact on Common stock on the above equity account?
a. no change
b. increase of $225,000
c. increase of $54,000
d. increase of $21,600,000
84. determines the ultimate distribution of the firm’s earnings between reinvestment and cash dividend
payment to shareholders.
a. Board of Directors’ agreements
b. Dividend policy
c. Financial expertise
d. Management efficiency
Chapter 15: Dividend Policy
85. Which of the following would be considered an alternative dividend policy?
I. Passive residual approach
II. Increasing dollar dividend approach
a. I only
b. II only
c. Both I and II
d. Neither I nor II
86. A dividend method that many tech companies favor in order to have more tax efficiency, boost earnings per
share and signal that the company has more productive uses for its cash than paying dividends is:
a. stock splits
b. reverse stock splits
c. dividend payout
d. stock buybacks
87. Which of the following influences the value of the firm?
I. Investment decisions
II. Dividend decisions
a. I only
b. II only
c. Both I and II
d. Neither I nor II
88. In recent years has been a major source of equity financing for private industry.
a. DRIPs
b. Common stock sales
c. Retention of earnings
d. Preferred stock sales
89. Several regulations limit dividend payments. All of the following limit dividend payments except:
a. Capital impairment restriction
b. Restrictive covenants
c. Net earnings restriction
d. Liability restriction
Chapter 15: Dividend Policy
90. What is the signaling effect of dividend payments?
91. What are the factors that determine the dividend policy of a firm?
92. What is a DRIP and how does it work?
Chapter 15: Dividend Policy
93. What effect does a stock split have on outstanding shares of stock and what is its purpose?
94. What are the procedures for repurchasing stock?
95. Why do firms feel that liquidity is desirable even though it may mean that the firm does not utilize the
investment capability of cash? What other means does a firm use to take advantage of investment opportunities
since cash must be kept on hand?
96. Explain the “clientele effect.”