FIN 450 MODULE 4 PROBLEMS
DOWNLOAD P14-3 As president of Young�s of California, a large clothing chain, you have just received a letter from a major stocholder stocholder!! "he stocholder ass a#out the company�s dividend policy! policy! $n fact, the stocholder has ased you to estimate the amount of the dividend that you are liely to pay ne%t year! You have not yet collected all the information a#out the e%pected dividend payment, #ut you do no& the follo&ing' (1) "he company follo&s a residual dividend policy! policy! (*) "he total capital #udget for f or ne%t year is liely to #e one of three amounts, depending on the results of capital #udgeting studies that are currently under &ay! "he capital e%penditure amounts are +* million, +3 million, and +4 million! (3) "he forecasted level of potential retained earnings ne%t year is +* million! (4) "he target or optimal capital structure is a de#t ratio of 4! You have decided to respond You respond #y sending the stocholder the #est information availa#le to you! a! .escri#e a residual dividend policy! #! Compute the amount of the dividend (or the amount of ne& common stoc needed) and the dividend payout ratio for each of the three capital e%penditure amounts! c! Compare, contrast, and discuss the amount of dividends (calculated in part #) associated &ith each of the three capital e%penditure amounts!
P14-/-Alternative dividend policy- 0ver the last ten years, a rm has had the earning per share sho&n in the follo&ing tale! Year Y ear
2arning per share share
Year
2arning per share share
*1
+4!
*1
+*!4
*14
3!
*5
1!*
*13
3!*
*
1!
*1*
*!
*/
-!
*11
3!*
*6
!*
A) $f the rm�s dividend policy &ere #ased on a constant payment ratio of 4 for all years &ith positive earnings and other&ise, &hat &ould #e the annual dividend for each year7 #) $f the rm had a dividend pay out of +1! per share, increasing #y +!1 per share &henever the dividend payout fell #elo& for t&o consecutive years, &hat annual dividend &ould the rm pay each year7 C) $f the rms policy &ere to pay +! per share each period e%cept &hen earnings per share e%ceed +3!, &hen and e%tra dividend e8ual to of earnings #eyond +3! &ould #e paid, &hat annual dividend &ould the rm pay each year7 .) .iscuss the pros and cons of each dividend policy descri#ed in part a through c!
P14-1-Cash versus stoc dividend 9il&auee "ool "ool has the follo&ing stocholders e8uity account! "he rm�s common stoc currently sells for +4 per share! Preferred Prefer red stoc
+1,
Common stoc (4, shares at +1 par)
4,
Paid-in capital in e%cess of par
*,
:etained earnings
3*,
"otal stoc stocholders holders e8uity
+1,*, +1,* ,
A) ;ho& the e
P14-1/-;toc repurchase "he follo&ing nancial data on the >ond Company are availa#le? 2arning availa#le for common stocholders @um#er of shares of common stoc outstanding 2arning per share (+,4,) 9aret price per share PriceBearnings (PB2) ratio (+*+*)
+, 4, +* +* 1
"he rm is currently currently considering &hether it should should use +4, of its earnings to pay cash dividends of +1 per share or to repurchase at +*1-per share! A) Appro%imately ho& many shares of stoc can the rm repurchase at the +*1-per-share +*1-per-share price, using the funds that &ould have gone to pay the cash dividend7 >) Calculate the 2P; after the purchase! 2%plain your calculations! C) $f the stoc still sales at 1 times earnings, &hat &ill the maret price #e after the repurchase7