Posted: December 8th, 2015
Payout Policy
Payout Policy:
1.
Suppose that you own 1,900 shares of Nocash Corp. and the company is about to pay a 25% stock dividend. The stock currently sells at $100 per share.
| a. |
What will be the number of shares that you hold after the stock dividend is paid? (Do not round intermediate calculations.) |
| Number of shares |
| b. |
What will be the total value of your equity position after the stock dividend is paid? (Do not round intermediate calculations.) |
| Total value | $ |
| c. |
What will be the number of shares that you hold if the firm splits five for four instead of paying the stock dividend? |
| Number of shares hold |
2.
| Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.2 million shares that are outstanding. Shareholders require a 8% rate of return from Consolidated stock. |
| a. | What is the price of Consolidated stock? |
| Stock price | $ |
| b. | What is the total market value of its equity? (Enter your answer in millions.) |
| Market value of equity | $ million |
| Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. |
| c. | How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.) |
| New equity | $ million |
| d. | What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.) |
| Present value | $ million |
| e. | What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.) |
| Transfer of value | $ million |
3.
The expected pretax return on three stocks is divided between dividends and capital gains in the following way:
| Stock | Expected Dividend | Expected Capital Gain |
| A | $ 0 | $ 16 |
| B | 11 | 11 |
| C | 16 | 0 |
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| a. | If each stock is priced at $100, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 35% (The effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) |
| Stock | Pension | Investor Corporation | Individual |
| A | % | % | % |
| B | % | % | % |
| C | % | % | % |
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| b. | Suppose that investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an after-tax return of 8%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
| Stock | Price |
| A | $ |
| B | $ |
| C | $ |
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