22 Gitman/Zutter Principles of Managerial Finance, Brief, Seventh Edition
P13-9. Stock dividend—firm
LG 5; Intermediate
(a) 5%
Stock Dividend
(b) (1) 10%
Stock Dividend
(b) (2) 20%
Stock Dividend
Preferred stock $100,000 $100,000 $100,000
Common stock (at $2.00 par)
21,000122,000224,0003
1 10,500 shares
2 11,000 shares
3 12,000 shares
P13-10. Cash versus stock dividend
LG 5; Intermediate
a.
Cash Dividend
$0.01 $0.05 $0.10 $0.20
Preferred stock $ 100,000 $ 100,000 $100,000 $100,000
Common stock
(400,000 shares 
b.
Stock Dividend
1% 5% 10% 20%
Preferred stock $ 100,000 $ 100,000 $ 100,000 $ 100,000
Common stock
(xxx,xxx shares 
© 2015 Pearson Education, Inc.
23 Gitman/Zutter Principles of Managerial Finance, Brief, Seventh Edition
c. Stock dividends do not affect stockholders’ equity; they only redistribute retained earnings into
P13-11. Personal finance: Stock dividend—investor
LG 5; Intermediate
a.
= =
$80,000
EPS $2.00
40,000
b.
= =
400
Percent ownership 1.0%
40,000
c. Percent ownership after stock dividend: 440 44,000 1%; stock dividends maintain the same
ownership percentage. They do not have a real value.
d. Market price: $22 1.10 $20 per share
e. Her proportion of ownership in the firm will remain the same, and as long as the firm’s earnings
remain unchanged, so, too, will her total share of earnings.
P13-12. Personal finance: Stock dividend—investor
LG 5; Challenge
a.
= =
$120,000
EPS $2.40 per share
50,000
= =
500
b. Percent ownership 1.0%
50,000
His proportionate ownership remains the same in each case
c.
$40
Market price $38.10
1.05
= =
$40
Market price $36.36
1.10
= =
The market price of the stock will drop to maintain the same proportion because more shares are being
used.
d.
= =
$2.40
EPS $2.29 per share
1.05
= =
$2.40
EPS $2.18 per share
1.10
P13-13. Stock split—firm
LG 6; Intermediate
a. CS $1,800,000 (1,200,000 shares @ $1.50 par)
P13-14. Stock splits
© 2015 Pearson Education, Inc.
Chapter 13: Payout Policy 24
LG 6; Easy
a. 400 2 800 shares will be owned by Nathan after the split.
P13-15. Stock split versus stock dividend—firm
LG 5, 6; Challenge
a. There would be a decrease in the par value of the stock from $3 to $2 per share. The shares
outstanding would increase to 150,000. The common stock account would still be $300,000 (150,000
shares at $2 par).
P13-16. Stock dividend versus stock split—firm
LG 5, 6; Challenge
a. A 20% stock dividend would increase the number of shares to 120,000 but would not entail a decrease
in par value. There would be a transfer of $20,000 into the common stock account and $580,000 [($30
25 Gitman/Zutter Principles of Managerial Finance, Brief, Seventh Edition
$360,000
EPS stock split $2.88
125,000
= =
P13-17. Stock repurchase
LG 6; Intermediate
a.
b.
= = =
–
$800,000 $800,000
EPS $2.10 per share
(400,000 19,047) 380,953
If 19,047 shares are repurchased, the number of common shares outstanding will decrease and
earnings per share will increase.
c. Market price: $2.1010 $21.00 per share.
d. The stock repurchase results in an increase in earnings per share from $2.00 to $2.10.
e. The pre-repurchase market price is different from the post-repurchase market price by the amount of
the cash dividend paid. The post-repurchase price is higher because fewer shares are outstanding.
Cash dividends are taxable to the stockholder when they are distributed and are taxed at a maximum
15% tax rate. If the firm repurchases stock, taxes on the increased value resulting from the purchase
are also due at the time of the repurchase. The additional $1 gain would be taxed at either the
long-term capital gains rate of 15%, the same as the dividend, unless the stock was held for less than
one year; then the gain would be short term and taxed at the higher marginal ordinary income rate.
Which alternative is preferred by the shareholders would depend on the investors’ holding period for
the stock at the time the repurchase is made. Taxes would not have to be paid on the repurchase gains
until the shares are sold.
P13-18. Stock repurchase
LG 6; Challenge
a.
($1,200,000 0.40) $480,000
Shares outstanding needed 240,000
$2.00 $2.00
´
= = =
P13-19. Ethics problem
LG 6; Intermediate
Students should argue that all of the methods being contemplated by the chief financial officer (CFO) are
 Case
Case studies are available on www.myfinancelab.com.
© 2015 Pearson Education, Inc.
Chapter 13: Payout Policy 26
Establishing General Access Company’s Dividend Policy and Initial Dividend
This case requires students to evaluate the alternative dividend payout policies that a firm may follow. They need
to evaluate the alternatives with regard to both the financial facts of the firm as well as the stockholders’ dividend
preferences.
a. The company has experienced positive and increasing earnings since it went public. Management believes
that EPS should remain stable over the next three years (10%). This stable earning pattern is conducive to
b. The low-regular-and-extra dividend policy should be adopted for two reasons. First, this approach provides
c. There are six factors the board should consider before setting an initial dividend policy:
1. Legal constraints—Are there legal restrictions that come into play that will prohibit the firm from paying a
3. Internal constraints—This factor addresses whether or not the firm has the available funds to make the
cash dividend payments. Although legally a firm can borrow to pay dividends, most lenders are reluctant
to make such loans.
d. Ms. McNeely will want to set a dividend that is high enough to inform stockholders of the financial strength
of the firm. She needs to be cautious of not setting it too high and forcing the firm into a dividend cut
e. The initial dividend should be approximately $0.72 per share per year ($0.18 per quarter). General Access has
had EPS in excess of $0.72 since the year after it went public. This amount is a payout ratio of about 20%
© 2015 Pearson Education, Inc.
27 Gitman/Zutter Principles of Managerial Finance, Brief, Seventh Edition
 Spreadsheet Exercise
The answer to Chapter 13’s Rock-O-Corporation stockholder’s equity section spreadsheet problem is located on
the Instructor’s Resource Center at www.pearsonhighered.com/irc under the Instructor’s Manual.
 Group Exercise
Group exercises are available on www.myfinancelab.com.
Dividend policy is the subject of this chapter and its group exercise. The shadow and fictitious firms will be
closely linked again in this assignment. Specifically, recent dividend policy of the shadow firm will be used to
describe the dividend policy of the fictitious firm. Groups begin by retrieving information on the shadow firm’s
recent dividend policy. This information is then compared to recent EPS measures. These numbers are then used as
the basis for the fictitious firm’s numbers.
Next, groups are asked to describe a fictitious change in dividend policy. Not only are the specifics of dividend
payments to be detailed, but an explanation for the change is also required. One possibility would be to match the
shadow firm’s dividend growth rate during the past five years. The value of this project is magnified if the shadow
firm has had a stock split or repurchase. A stockholder’s equity account is then developed for the fictitious firm
based on the shadow firm’s account. The assignment is then concluded by detailing any actual changes in dividend
policy regarding each group’s shadow firm.
© 2015 Pearson Education, Inc.