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AFM121 Chapter 8: Chapter 8

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lemonbeetle804
16 Jun 2018
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM121
Professor
Steve Balaban

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Chapter 8
Dividend Date of Record: The date when dividend payments are made to shareholders
on record.
Ex-Dividend Date: Set at the second business date before the record date, and shares
trade without the right to the associated dividend on and after this date.
Dividend Reinvestment Plans: Reinvest shareholders’ dividends to purchase additional
shares for them.
Stock Dividends: Taxed the same as cash dividends.
Parsi Passu: The term used to described several different preferred shares with equal
rights.
P = Div./r P = Price of Pref. Share Div. = Dividend of Pref. Share r = Market Interest Rate
Convertible Preferreds: Are convertible into common shares at a conversion price that
is generally at a modest premium above its converted value to discourage early
conversion.
Conversion Premium = P of Common Share – P of Pref. Share/s
% Premium = (P of Common Share – P of Pref. Share/s) / (P of Common Share)
Payback (in years) = % Premium / (convertible yield – common yield)
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Document Summary

Dividend date of record: the date when dividend payments are made to shareholders on record. Ex-dividend date: set at the second business date before the record date, and shares trade without the right to the associated dividend on and after this date. Dividend reinvestment plans: reinvest shareholders" dividends to purchase additional shares for them. Stock dividends: taxed the same as cash dividends. Parsi passu: the term used to described several different preferred shares with equal rights. P = div. /r p = price of pref. Convertible preferreds: are convertible into common shares at a conversion price that is generally at a modest premium above its converted value to discourage early conversion. Conversion premium = p of common share p of pref. % premium = (p of common share p of pref. Payback (in years) = % premium / (convertible yield common yield) Yield = annual dividend / market price.

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Related Questions

On August 31, 2013, Chickasaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, priced to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of Chickasaw's common stock. Chickasaw records interest expense at the effective rate. On Aug 31, 2016, investors in Chickasaw's convertible bonds tendered 20% of the bonds for conversion into common stock that had a market value of $20 per share on the date of conversion. On Jan 1, 2015, Chickasaw Ind. issued $40 million of its 20-year, 7% bonds dated Jan 1 at a price to yield 8%. On Dec 31, 2016, the bonds were extinguished early through acquisition in the open market by Chickasaw for $40.5 million.

(a) What are convertible bonds and why would Chickasaw have issued them? (b) Suggest an alternative to the method Chickasaw used to calculate and record interest. (c) Answer question 2 (of the case problem).

25. If a merger is done for __________ reasons, then the combined corporation will be worth more than the two individual corporations (2+2 = 5).

  1. Expropriation
  2. Synergy
  3. Hubris
  4. Wealth Redistribution

26. A(n) __________ is when a parent company sells shares of a subsidiary to the public.

  1. Divestiture
  2. Leveraged Buyout
  3. Joint Venture
  4. Equity Carveout

27. Antitakeover measures primarily protect ______________.

  1. Acquiring firm managers
  2. Acquiring firm shareholders
  3. Target firm shareholders
  4. Target firm managers

28. If investors prefer dividends to capital gains (Bird in the Hand theory is true), then

  1. The cost of equity will decrease as the retention ratio increases
  2. The cost of equity will decrease as the payout ratio decreases
  3. The cost of equity will increase as the retention ratio decreases
  4. The cost of equity will increase as the payout ratio decreases

29. _______________ are when the firm buys back a set number of shares on a set date for a specific price.

  1. Dividend Reinvestment Plans
  2. Tender Offers
  3. Dutch auctions
  4. Clientele Repurchases

30. Any signaling effect of dividends should occur on the ______________.

  1. Declaration Date
  2. Ex-Dividend Date
  3. Record Date
  4. Payment Date

31. Which statement is TRUE?

  1. Dividend rights say that shareholders get any remaining assets after all creditors have been paid in bankruptcy
  2. According to financial theory, shareholder wealth should be unaffected by a two-for-one stock split.
  3. A stock split is a large stock dividend so that you might have twice as many shares with each share being worth half as much.
  4. The stock price should fall by the amount of the dividend on the ex-dividend date.

32. Which statement is FALSE?

  1. In a Stock Swap, the acquiring firm issues shares of stock in order to pay for the acquisition
  2. A conglomerate merger is between unrelated firms
  3. A Leveraged Buyout involves creating a new company out of part of your company and then selling shares of the new company to the public.
  4. In an asset purchase, the acquiring firm does not assume the liabilities of the target firm.

33. Suppose that prior to a merger the stock price of the target company was $50 and the stock price of the acquiring company was $40. If the acquiring firm agrees to pay 1.5 share of their stock for every share of the target firms stock, then what premium are they offering?

a) 10% b) 20% c) 25% d) 33%

34. Which statement is FALSE?

  1. The White Knight defense is when you try to sell yourself to a

P16-7 (Computation of Basic and Diluted EPS) Charles Austin ofthe controller’s office of Thompson Corporation was given theassignment of determining the basic and diluted earnings per sharevalues for the year ending December 31, 2015. Austin has compiledthe information listed below. 1. The company is authorized to issue8,000,000 shares of $10 par value common stock. As of December 31,2014, 2,000,000 shares had been issued and were outstanding. 2. Theper share market prices of the common stock on selected dates wereas follows. Price per ShareJuly 1, 2014 $20.00January 1, 2015 21.00April 1, 2015 25.00July 1, 2015 11.00 August 1, 2015 10.50November1, 2015 9.00December 31, 2015 10.00 3. A total of 700,000 shares ofan authorized 1,200,000 shares of convertible preferred stock hadbeen issued on July 1, 2014. The stock was issued at its par valueof $25, and it has a cumulative dividend of $3 per share. The stockis convertible into common stock at the rate of one share ofconvertible preferred for one share of common. The rate ofconversion is to be automatically adjusted for stock splits andstock dividends. Dividends are paid quarterly on September 30,December 31, March 31, and June 30. 4. Thompson Corporation issubject to a 40% income tax rate. 5. The after-tax net income forthe year ended December 31, 2015, was $11,550,000.The followingspecific activities took place during 2015. 1. January 1—A 5%common stock dividend was issued. The dividend had been declared onDecember 1, 2014, to all stockholders of record on December 29,2014.April 1—A total of 400,000 shares of the $3 convertiblepreferred stock was converted into common stock. The company issuednew common stock and retired the preferred stock. This was the onlyconversion of the preferred stock during 2015. 3. July 1—A 2-for-1split of the common stock became effective on this date. The boardof directors had authorized the split on June 1. 4. August 1—Atotal of 300,000 shares of common stock were issued to acquire afactory building. 5. November 1—A total of 24,000 shares of commonstock were purchased on the open market at $9 per share. Theseshares were to be held as treasury stock and were still in thetreasury as of December 31, 2015. 6. Common stock cashdividends—Cash dividends to common stockholders were declared andpaid as follows. April 15—$0.30 per share October 15—$0.20 pershare 7. Preferred stock cash dividends—Cash dividends to preferredstockholders were declared and paid as scheduled. Instructions (a)Determine the number of shares used to compute basic earnings pershare for the year ended December 31, 2015. (b) Determine thenumber of shares used to compute diluted earnings per share for theyear ended December 31, 2015. (c) Compute the adjusted net incometo be used as the numerator in the basic earnings per sharecalcu-lation for the year ended December 31, 2015.