Chapter 17 (Divided)

1. The after-tax dividend is the pretax dividend times one minus the tax rate, so:

After-tax dividend = $5.1(1 – .15) = $4.335

The stock price should drop by the after-tax dividend amount, or:

Ex-dividend price = $93.85 – 4.335 = $89.515

2. a. The shares outstanding increases by 10 percent, so:

New shares outstanding = 40,000(1.10) = 44,000

New shares issued = 4,000 Shares

Since the par value of the new shares is $.50, the capital surplus per share is $29.5. The total
capital surplus is therefore:

Capital surplus on new shares = 4,000($29.5) = $118,000

Common stock ($1 par value) $ 22,000

Capital surplus 403,000
Retained earnings 518,120
$943,120

b. The shares outstanding increases by 25 percent, so:

New shares outstanding = 40,000(1.25) = 50,000

New shares issued = 10,000

Since the par value of the new shares is $0.5, the capital surplus per share is $29.5 the total
capital surplus is therefore:

Capital surplus on new shares = 10,000($29.5) = $295,000

Common stock ($0.5 par value) $ 25,000

Capital surplus 580,000
Retained earnings 338,120
$943,120
3. a. To find the new shares outstanding, we multiply the current shares outstanding times the ratio
of new shares to old shares, so:
4 for 1 4/1 multiply the ratio with share outstanding

New shares outstanding = 40,000*(4/1) = 160,000

The equity accounts are unchanged except the par value of the stock is changed by, so the new
par value is:

New par value = $0.5 (1/4) = $.125 per share.

b. To find the new shares outstanding, we multiply the current shares outstanding times the ratio
of new shares to old shares, so:
1 for 5 1/5 Multiply the ratio with share outstanding

New shares outstanding = 50,000(1/5) = 10,000.

The equity accounts are unchanged except the par value of the stock

New par value = $0.5 (5/1) = $2.5 per share.

4. To find the new stock price, we divide the current stock price by the ratio of 5 for 3, 5/3 , so:

a. $80(3/5) = $48.00

b. $80(1/1.15) = $69.56

c. $80(1/1.425) = $56.14

d. $80(7/4) = $140

e. To find the new shares outstanding, we multiply the current shares outstanding by the ratio of 5
for 3, 5/3 so:

a: 425,000(5/3) = 708,334

b: 425,000(1.15) = 488,750

c: 425,000(1.425) = 605,625

d: 425,000(4/7) = 242,857

5. The stock price is the total market value of equity divided by the shares outstanding, so:

P0 = $353,700 equity/9,000 shares = $39.3 per share

Ignoring tax effects, the stock price will drop by the amount of the dividend, so:

PX = $39.3 – 1.40 = $37.9

 The total dividends paid will be:

$1.40 per share (9,000 shares) = $12,600

The equity and cash accounts will both decline by $12,600

6. Repurchasing the shares will reduce cash and shareholders’ equity by $12,600. The shares
repurchased will be the total purchase amount divided by the stock price, so:

Shares bought = $12,600/$39.3 = 320.61

And the new shares outstanding will be:

New shares outstanding = 9,000 – 320.61 = 8,679.39

After repurchase, the new stock price is:

Share price = ($353,700 – 12,600)/8,679.39 shares = $39.30

The repurchase is effectively the same as the cash dividend because you either hold a share worth
$39.3, or a share worth $37.9 and $1.40 in cash. Therefore, you participate in the repurchase
according to the dividend payout percentage; you are unaffected.

7. The stock price is the total market value of equity divided by the shares outstanding, so:

P0 = $571,000 equity/14,000 shares = $40.79 per share

The shares outstanding will increase by 25 percent, so:

New shares outstanding = 14,000(1.25) = 17,500

The new stock price is the market value of equity divided by the new shares outstanding, so:

PX = $571,000/17,500 shares = $32.63

8. With a stock dividend, the shares outstanding will increase by one plus the dividend amount, so:

New shares outstanding = 385,000(1.15) = 442,750

New Shares Issued= 57,750

The capital surplus is the capital paid in excess of par value, which is $1, so:

Capital surplus for new shares = 57,750($42) = $ 2,425,500

The new capital surplus will be the old capital surplus plus the additional capital surplus for the new
shares, so:

Capital surplus = $846,000 + 2,425,500 = $3,271,500

 The new equity portion of the balance sheet will look like this:

Common stock ($1 par value) $

442,750
Capital surplus 3,271,500
Retained earnings 1,237,550
$4,951,800

9. The only equity account that will be affected is the par value of the stock.

New par value = $1(1/4) = $0.25 per share.

The total dividends paid this year will be the dividend amount times the number of shares
outstanding. The company had 385,000 shares outstanding before the split. We must remember to
adjust the shares outstanding for the stock split, so:

Total dividends paid this year = $0.75(385,000 shares) (4/1 split) = $1,155,000

The dividends increased by 10 percent, so the total dividends paid last year were:

Last year’s dividends = $1,155,000/1.10 = $1,050,000

And to find the dividends per share, we simply divide this amount by the shares outstanding last
year. Doing so, we get:

Dividends per share last year = $1,050,000/385,000 shares = $2.73

10. The price of the stock today is the PV of the dividends, so:

P0 = $1.85/1.15 + $58/1.152 = $45.47

To find the equal two year dividends with the same present value as the price of the stock, we set up
the following equation and solve for the dividend (Note: The dividend is a two year annuity, so we
could solve with the annuity factor as well):
(PVIFA15%, 2y)
$45.47 = D/1.15 + D/1.152 (1-1/ (1.15)2)/ .15
1.6257
D is same so use annuity concept formula
45.47 = D (PVIFA15%,2y)
D = 45.47/1.6257
D = 27.966

We now know the cash flow per share we want each of the next two years. We can find the price of
stock in one year, which will be:

P1 = $58/1.15 = $50.43

Since you own 1,000 shares, in one year you want:

Cash flow in Year one = 1,000($27.96) = $27,960

But you’ll only get:

Dividends received in one year = 1,000($1.85) = $1850

Thus, in one year you will need to sell additional shares in order to increase your cash flow. The
number of shares to sell in year one is:

Shares to sell at time one = ($27,960 – 1850)/$50.43 = 518 shares

At Year 2, you cash flow will be the dividend payment times the number of shares you still own, so
the Year 2 cash flow is:

Year 2 cash flow = $53(1,000– 518) = $27,956 (as I rounded off many times, the difference of $4 is there)

11. If you only want $750 in Year 1, you will buy:

($1,850 – 750)/$50.43 = 21.81 shares

at time 1. Your dividend payment in Year 2 will be:

Year 2 dividend = (1,000 + 21.81)($58) = $59,264.98

Note, the present value of each cash flow stream is the same. Below we show this by finding the
present values as:

PV = $750/1.15 + $59,264.98/1.152 = $45,465.01

PV = 1,000($1.85)/1.15 + 1,000($58)/1.152 = $45,465.03