Question

Harris Corp has 4 million outstanding common shares, and paid $2.15 per share in dividends last year. The current share price is $28. For the past 6 years the company has maintained a policy of paying out 65% of earnings as cash dividends. Exhibit below contains the projected balance sheet for Harris Corp for the upcoming year end, assuming no dividends. Earnings after tax are projected at $14,153,846.15.

a). If Harris Corp maintains its steady 65% cash dividend payout policy, what will be the total cash dividend payout and the total debt-to-equity ratio following the payout. What dividend payment will a holder of 300 common shares receive? Show your calculations.

b). Suppose that Harris Corp retains all its cash in order to finance the purchase of a large piece of land that will be used for future development of a new production centre. Instead of a cash dividend, a 30% stock dividend will be paid. Assess the impact of a stock dividend as follows:

i). What will the holder of 300 common shares receive?

ii). How will the balance sheet change, given the stock dividend, and what will the total debt-to-equity ratio be if earnings are projected to be unchanged after the land purchase?

iii). What can this same shareholder expect to receive in cash dividends next year if Harris returns to its steady 65% cash dividend payout policy?

c). Suppose that Harris has no investment plans and would like to payout 65% of its earnings to shareholders in the form of a share repurchase this year, and then will return to its policy of paying cash dividends in its future years. Earnings are projected to be unchanged. Assess the impact of a share repurchase as follows:

i). Calculate the number of shares Harris can repurchase if the share price remains at $28.

ii). Calculate the number of shares that will remain outstanding.

iii). In the next year, when the cash dividends are resumed, Calculate the per-share dividend and amount of dividends to be received by the former owner of 300 shares.

d). Referring to your analysis in part a) to c) briefly explain which of the three policies would be most attractive to shareholders.

Projected Balance Sheet Harris Corp.

Assets

Current Assets

Cash

18,000,000

Accounts Receivable

2,400,000

Inventory

9,230,000

29,630,000

PPE

6,240,000

Land

6,000,000

41,870,000

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts Payable

1,870,000

Notes Payable

2,000,000

3,870,000

Long Term Debt

9,000,000

Common Shares

4,000,000

Retained Earnings

25,000,000

$41,870,000