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    Dividend Policy Tuto 1

    Uploaded by

    Muhammad Zulhisyam
    This document contains sample questions and answers related to dividends and dividend policy. It discusses different types of cash dividends such as regular cash dividends, stock dividends, and stock splits. It also describes a residual dividend policy and discusses whether a firm can increase its share price by changing its dividend policy given the clientele effect. Specific questions are answered regarding appropriate dividend policies, earnings per share, and calculating total wealth as a shareholder.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Dividend Policy Tuto 1

    Uploaded by

    Muhammad Zulhisyam
    5 views3 pages
    This document contains sample questions and answers related to dividends and dividend policy. It discusses different types of cash dividends such as regular cash dividends, stock dividends, and stock splits. It also describes a residual dividend policy and discusses whether a firm can increase its share price by changing its dividend policy given the clientele effect. Specific questions are answered regarding appropriate dividend policies, earnings per share, and calculating total wealth as a shareholder.

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    Original Title

    DIVIDEND POLICY TUTO 1

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    This document contains sample questions and answers related to dividends and dividend policy. It discusses different types of cash dividends such as regular cash dividends, stock dividends, and stock splits. It also describes a residual dividend policy and discusses whether a firm can increase its share price by changing its dividend policy given the clientele effect. Specific questions are answered regarding appropriate dividend policies, earnings per share, and calculating total wealth as a shareholder.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    5 views3 pages

    Dividend Policy Tuto 1

    Uploaded by

    Muhammad Zulhisyam
    This document contains sample questions and answers related to dividends and dividend policy. It discusses different types of cash dividends such as regular cash dividends, stock dividends, and stock splits. It also describes a residual dividend policy and discusses whether a firm can increase its share price by changing its dividend policy given the clientele effect. Specific questions are answered regarding appropriate dividend policies, earnings per share, and calculating total wealth as a shareholder.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    QUESTION 1

    Answer all questions. Answer (T) for TRUE and (F) for FALSE.
    1. TRUE
    2. FALSE
    3 FALSE
    4.TRUE
    5. FALSE
    6. TRUE
    7. FALSE
    8. TRUE
    9. TRUE
    10. FALSE
    QUESTION 3
    Dividends come in several different forms which are usually paid in stock instead of
    cash.
    Determine any three (3) types of cash dividends
    Three types of cash dividends are :
    1) Regular cash dividend
    It is paid out of a firm’s profits to the ordinary shareholders. It can be stated as
    dividends per share or dividend yield. It reduces cash and retains earnings of the
    firm.
    2) Stock dividends or Scrip Issue
    New issues of shares to existing shareholders as dividend for free. Popularly
    known as bonus issue shares or scrip dividend. Increases the number of shares
    outstanding and reduces the value of each share.
    3) Stock Split
    Increase the number of shares outstanding. Stock split occurs for example when
    each OS of RM1.00 each is split into two shares of RM0.50 each, thus creating
    cheaper shares with greater marketability. Stock price will drop after stock split

    QUESTION 6
    a. It is suggested that the firm should follow a “residual” dividend policy. Explain how
    dividends would be paid under this policy and the drawbacks of such policy,’

    Dividends are paid only if profits are not completely used for investment
    purposes. It implies that the dividends should be the remaining amount of after tax
    profits (the “residual” amount), after putting aside money to invest in all viable
    investment opportunities. Therefore, the dividend policy should be maintain the optimal debt
    ratio in financing future investments, accept an investment if NPV is positive and finance the
    equity portion of new investments first by internally generated funds. If internally generated
    funds still remain, pay dividends.

    b. In the context of the “clientele effect”, discuss whether or not a firm can increase its share
    price by changing its dividend policy.
    In the context of the “clientele effect”, a firm cannot increase its share price by
    changing its dividend policy because any change in the dividend policy would influence the
    clientele group that might force them to sell the shares that eventually will result in a drop in
    the share price

    QUESTION 8
    Answer TRUE and FALSE to each of the following statement related to dividend
    policy. Give reasons to support your answer.

    a. A firm that has been paying dividends every year, and unexpectedly runs out of
    cash, should issue shares to raise the money needed to continue paying dividends.
    FALSE
    b. A firm which has a clientele of investors who want large dividends should not adopt a
    residual dividend policy.

    TRUE

    c. The tax view of dividend policy suggests that because of personal taxes, firms have
    an incentive to pay higher dividends where possible.

    FALSE

    QUESTION 9
    SM Bhd finances its operation with 100% equity. The company currently has 150,000
    shares with a market price of RM2.50 per share. The company’s most recent net
    income after tax was RM40,000. The board of directors of the company has decided to
    use RM20,000 excess of cash to repurchase its stock at RM2.50 per share. The
    company also has other assets worth RM355,000 valued at market price. Jen is the
    shareholder of SM Bhd who owns 10% of the company’s shares.
    Required: Compute the followings:
    a. Earnings per share (EPS)

    Equity = 375k---> (150k x RM2.50)


    No of share repurchase = Net income/ (no of shares outstanding - no of share
    repurchase)
    = RM20k / RM2.50
    = 8k units
    EPS = RM40k / (150k - 8k)
    = RM0.28

    b. Market price per share


    RM2.50 per share
    c. Price earning ratio (P/E)
    P/E ratio = market price per share/EPS
    = RM2.50/RM0.28
    = 8.9 times

    d. Calculate the total wealth of Jen if she was doing the homemade dividend.
    Home made dividend : Jen
    Share owned = 10% x 150k = 15k units
    Shares repurchased by co from Jen = (15k /150k) x 8k
    = 800 units
    Hold : 14,200 x RM2.50 = RM35,500
    Sell : 800 x RM2.50 = RM2,000
    Total wealth = RM37,500

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