Problem 18-10 Problem 18-14 Problem 18-15
Copyright © 2011 McGraw-Hill/Irwin and ANSR Source India Pvt Ltd. (www.ansrsourceindia.com)
Dividend Policy and Retained Earnings
Spreadsheet Templates
Foundations of Financial Management
MAIN MENU – CHAPTER 18
Spreadsheet Templates by Block, Hirt and Danielsen
Problem 18-10
Objective: Dividend yield
Student Name:
Course Name:
Student ID:
Course Number:
The stock of North American Dandruff Company is currently selling at $80 per share. The firm
pays a dividend of $2.50 per share.
a. What is the dividend yield?
b. If the firm has a payout rate of 50 percent, what is the firm’s P/E ratio?
Foundations of Financial Management
Block, Hirt and Danielsen
Problem 18-10
Instructions
Enter formulas to calculate the requirements of this problem.
Information
Stock price $80
Dividend $2.50
a. What is the annual dividend yield? 3.13%
b. If the firm has a payout rate of 50 percent, what is the firm’s P/E ratio? 16.00
Solution
Problem 18-14
Objective: Cash dividend policy
Student Name:
Course Name:
Student ID:
Course Number:
Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year.
Assume its balance sheet is as follows:
Cash $312,500
Accounts receivable 800,000
Fixed Assets 987,500
Total Assets $2,100,000
Accounts payable $445,000
Long-term payable 280,000
Common stock (250,000 shares at $2 par)
500,000
Retained earnings 875,000
Total liabilities and stockholders’ equity $2,100,000
a. From a legal perspective, what is the maximum amount of dividends per share the firm could pay?
Is this realistic?
b. In terms of cash availability, what is the maximum amount of dividends per share the firm could pay?
c. Assume the firm earned 16 percent return on stockholders’ equity last year. If the board wishes to
pay out 60 percent of earnings in the form of dividends, how much will dividends per share be?
Assets
Liabilities and Stockholders’ Equity
Foundations of Financial Management
Block, Hirt and Danielsen
Problem 18-14
Instructions
Enter formulas to calculate the requirements of this problem.
a. From a legal perspective, what is the maximum amount of dividends per share the firm could pay?
$3.50
Is this realistic?
This would not be realistic in light of the firm‘s cash balance.
b. In terms of cash availability, what is the maximum amount of dividends per share the firm could pay?
Maximum dividend $1.25
c. Assume the firm earned 16 percent return on stockholders’ equity last year. If the board wishes to
pay out 60 percent of earnings in the form of dividends, how much will dividends per share be?
Stockholders’ Equity $1,375,000
Return on equity $220,000
Dividends $132,000
Dividend per share $0.528
Solution
Problem 18-15
Objective: Dividends and stockholder wealth maximization
Student Name:
Course Name:
Student ID:
Course Number:
The Warner Corporation has earnings of $750,000 with 300,000 shares outstanding. Its P/E ratio is 16.
The firm is holding $400,000 of funds to invest or pay out in dividends. If the funds are retained,
the aftertax return on investment will be 15 percent, and this will add to present earnings. The 15
percent is the normal return anticipated for the corporation, and the P/E ratio would remain unchanged.
If the funds are paid out in the form of dividends, the P/E ratio will increase by 10 percent because
the stockholders in this corporation have a preference for dividends over retained earnings.
Which plan will maximize the market value of the stock?
Foundations of Financial Management
Block, Hirt and Danielsen
Solution
Problem 18-15
Instructions
Enter formulas to complete the requirements of this problem.
Information
Return on investment 15%
Funds to invest or pay out $400,000
Earnings $750,000
Shares outstanding 300,000
P/E 16
Retained Earnings
Incremental earnings $60,000
Earnings per share $2.70
Price of stock $43.20
Payout Earnings
New P/E 17.6
Earnings per share $2.50
Price of stock $44.00
Which plan will maximize the market value of the stock?
The payout option provides the maximum market value.
Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 18-15