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CHAPTER 17
DIVIDENDS AND DIVIDEND POLICY
Answers to Concepts Review and Critical Thinking Questions
1. Dividend policy deals with the timing of dividend payments, not the amounts ultimately paid.
8. If these firms just went public, they probably did so because they were growing and needed the
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Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
1. The aftertax dividend is the pretax dividend times one minus the tax rate, so:
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3. a. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of
b. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of
4. To find the new stock price, we multiply the current stock price by the ratio of old shares to new
shares, so:
5. The stock price is the total market value of equity divided by the shares outstanding, so:
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6. Repurchasing the shares will reduce cash and shareholders’ equity by $12,600. The shares repurchased
will be the total purchase amount divided by the stock price, so:
7. The stock price is the total market value of equity divided by the shares outstanding, so:
8. With a stock dividend, the shares outstanding will increase by one plus the dividend amount, so:
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$4,951,800
9. The only equity account that will be affected is the par value of the stock. The par value will change
by the ratio of old shares to new shares, so:
Intermediate
10. The price of the stock today is the PV of the dividends, so:
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But you’ll only get:
12. a. If the company makes a dividend payment, we can calculate the wealth of a shareholder as:
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b. If the company pays dividends, the current EPS is $1.40, and the P/E ratio is:
Challenge
13. Assuming no capital gains tax, the aftertax return for the Gordon Company is the capital gains growth
14. Using the equation for the decline in the stock price ex-dividend for each of the tax rate policies,
we get:
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15. Since the $3,000,000 cash is after corporate tax, the full amount will be invested. So, the value of each
alternative is:
Alternative 1:
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So, the aftertax dividend for the corporation will be:
This means the aftertax corporate dividend yield is:
The future value of the company’s investment in preferred stock will be:
Since the future value will be paid to shareholders as a dividend, the aftertax cash flow will be:
Alternative 2:
The firm pays out dividend now, and individuals invest on their own. The aftertax cash received by
shareholders now will be:
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And the taxes on the preferred dividends will be:
16. a. Let x be the ordinary income tax rate. The individual receives an after-tax dividend of:
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