Topic 5

Chapter 19: Questions and Problems 5: Regular Dividends

The balance sheet for Levy Corp. is shown here in market value terms. There are 12,000 shares of stock outstanding.

The company has declared a dividend of $1.90 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? What will it sell for tomorrow? What will the balance sheet look like after the dividends are paid?

Questions and Problems 6: Share Repurchase

In the previous problem, suppose Levy has announced it is going to repurchase $22,000 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase? Ignoring tax effects, show how the share repurchase are effectively the same as a cash dividend.

Questions and Problems 7: Stock Dividends

The market value balance sheet for Outbox Manufacturing is shown here. Outbox has declared a stock dividend of 25 percent. The stock goes ex-dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 20,000 shares of stock outstanding. What will the ex-dividend price be?

Questions and Problems 9:Stock Splits

In the previous problem, suppose the company instead decides on a five for one stock split when the market value of its stock is $45 per share. The firm's 45 cent per share cash dividend on the new (post-split) shares represents an increase of 10 percent over last year's dividend on the pre-split stock. What effect does this have on the equity accounts? What was last year's dividend per share?

Questions and Problems 11: Homemade Dividends

You own 1,000 shares of stock in Avondale Corporation. You will receive a dividend of $1.10 per share in one year. In two years, Avondale will pay a liquidating dividend of $56 per share. The required return on Avondale stock is 14 percent. What is the Current share price of your stock ignoring taxes)? If you would rather have equal dividends in each of the next two years, show how you can accomplish this by creating homemade dividends. (Hint: Dividends will be in the form of an annuity)

Questions and Problems 14: Dividends and Firm Value

The net income of Novis Corporation is $85,000. The company has 25.000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1,725,000. The appropriate discount rate for Novis is 12 percent, and the dividend tax rate is zero.

a. What is the current value of the firm assuming the current dividend has not yet been paid?

b. What is the ex-dividend price of Novis's stock if the board follows its current policy?

c. At the dividend declaration meeting several board members claimed that the dividend is too meager and is probably depressing Novis's price. They proposed that Nevis sell enough new shares to finance a $4.60 dividend.

i. Comment on the claim that the low dividend is depressing the stock price Support your argument with calculations.

ii. If the proposal is adopted, at what price will the new shares sel? How many will be sold?