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11 Dec 2019

ABC Company has been profitable in FY 2015 and the Board is planning to declare dividends to its shareholders. They intend to declare a cash dividend of $2 million at the forthcoming annual general meeting. However, the Board is unsure whether this is an appropriate level of dividends to declare.

(a) Calculate the dividend pay-out ratio and the ex-dividend share price.

(b) Shareholders of a company are eligible to receive dividends when declared while bondholders are eligible to receive interest payments which is mandatory. Based on this, shares are considered as riskier compared to bonds and the required rate of return on shares is higher than that on bonds.

However, in reality, bondholders face more risk than shareholders. Examine how this could arise and how the impact can be reduced.

earnings after tax = 6,359

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Question: How would you answer this students post with a paragraph or two with reference.

A company's net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings (Investopedia, n.d.). Since dividends are from net profits (or retained earnings) this helps explain why a company may issue or not issue dividends; meaning it depends on what the business intentions or strategic plan is (if they are in the build up or start up stage or want to invest in something large a company might not issue a dividend so they can invest that capital, or if they are larger company with a history of net income and retained earnings it may use a dividend as a means to reward their "owners" the stockholders). Also to consider a business does not have to issue dividends. It also may depend on how the board perceives growing income, either by stock price or thru dividends paid back when earnings are good. For example dividends "can" be taxed differently than other means of income meaning it may benefit the stockholders to receive that "income" thru dividends. Also to consider is, Economists Merton Miller and Franco Modigliani argued that a company's dividend policy is irrelevant, and it has no effect on the price of a firm's stock or its cost of capital (Investopedia, n.d.). Although not perfect, the theory states one can have the same effect either by dividend or use of the stocks to make the same effect, although this does not include items such as tax breaks, etc.

Adam Ketch

Reference:

Investopedia (n.d.) Dividend definition. Retrieved from http://www.investopedia.com/terms/d/dividend.asp

Show Less

QUESTION 10

Short-term bond yields are generally ______ than long-term bond yields, whereas long-term bond prices are generally ________ than short-term bond prices.

more volatile, less volatile

less volatile, more volatile

less volatile, less volatile

more volatile, more volatile

2.5 points

QUESTION 11

Common stockholders have a residual claim to income, in other words they are last in line.

True

False

2.5 points

QUESTION 12

Stock classes are similar to bond ratings in that they are used to rank the performance of different corporations' stock.

True

False

2.5 points

QUESTION 13

The particular type of shareholder voting used has become less important with the influence of takeovers, leveraged buy-outs, and other challenges to management control.

True

False

2.5 points

QUESTION 14

Which of the following is not a true statement?

Common stockholders have a residual claim to income.

Bondholders may force a corporation into bankruptcy for failure to make interest payments.

Common stockholders are legally entitled to some dividend.

A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock.

2.5 points

QUESTION 15

The purpose of cumulative voting is

to maintain majority control of the board of directors.

to allow minority stockholders the possibility of a voice on the board of directors.

to obstruct unfriendly mergers and takeover efforts.

to prevent the dilution of common stock through preemptive rights offerings.

2.5 points

QUESTION 16

A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called

a preemptive right.

a poison pill.

ex-rights.

rights-on.

2.5 points

QUESTION 17

A possible advantage to a rights offering is that

current shareholders are protected against dilution.

the firm has a built-in market of knowledgeable investors.

distribution costs are lower than a public offering.

All of these options

2.5 points

QUESTION 18

Which of the following actions will provide the shareholders with the most total wealth when a company conducts a rights offering?

Exercise the rights for new shares.

Sell the rights themselves and hold existing shares and cash.

Exercise the rights and sell the shares.

None of these options

2.5 points

QUESTION 19

The subscription rate of a new offering is generally _______ than the rights-on price and _______ than the ex-rights price.

higher; higher

higher; lower

lower; higher

lower; lower

Please show work if possible!

The residual dividend theory suggests that dividends should be paid to stockholders first and then what is left can be reinvested by the firm.
True.
False.

An investor purchased 300 shares of ABC Inc. stock on Wednesday, December 16. ABC paid its quarterly dividend of $1.10 a share on Thursday, December 31. The record date was Friday, December 18. How much dividend income did the investor receive on December 31 from his investment in JLK stock?
$0.00
$110
$165
$330

The higher the dividend payout ratio, the more a company must rely on external financing.
True
False

Which of the following transactions will increase a corporation's retained earnings?

stock repurchase
stock split
stock dividend
none of the above

JBC Corp. declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet JBC Corp. stock declined by 3% the day of the announcement. RBG Corp. declared a dividend of $2 per share, which was the same as the prior year, and its stock increased in value by 2% on the day of the announcement. These events could be most readily explained by the _________
Information effect.
Residual dividend theory.
Clientele effect.
Expectations theory.

Which one of the following is probably the best argument in favor of a reverse stock split?
to lower the current stock price to its normal trading range
to provide additional shares to all its shareholders
to avoid delisting
to increase the value of the firm

The ex-dividend date is ________ the holder of record date.
2 days before.
5 days before.
2 weeks before.
3 days after.

Edwards Enterprises currently has 145,000 shares of stock outstanding at a market price per share of $57. Today, the firm announced a 3-for-2 stock split. What will the price per share be after the split?
$19.00
$38.00
$47.20
$85.50

Books and More currently has 75,000 shares of stock outstanding, net income of $46,000, and a PE ratio of 18.7. What will the firm's PE ratio be if the firm repurchases 15,000 shares? Assume all else remains constant.
12.67
13.08
14.96
20.23

John owns 1000 shares of stock in Zebar Corporation with a market value of $2,000. Zebar declares a 10% stock dividend. After the dividend is paid, John owns____________

1100 shares with a market value of $2,200.
1000 shares with a market value of $2,200.
1100 shares with a market value of $2,000.
1100 shares with a market value of $2,100.

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