14-7 Stock Split

Suppose you own 2,000 common share of Laurance incorporate. The EPS is $10.00, the DPS
is $3.00, and the stock sells for $80 per share. Laurance announces a 2-for-1 split. Immedietly
after the split, how many shares will you have, what will the adjusted EPS and DPS be, and
what would you expect the stock price to be?

e. suppose Buena Terra’s management is firmly opposed to cutting the dividend; that is, it
wishes to maintain the $3 dividend for the next year. Suppose also that the company is
committed to funding all profitable projects and is willing to issue more debt (along with the
available retained earnings) to help finance the company’s capital budget. Assume the resulting
change in capital structure has a minimal impact on the company’s composite cost of capital,
so that the capital budget remains at $10 million. What portion of this year’s capital budget
would have to be financed with debt?

f. suppose once again that Buena Terra’s management want to maintain the $3 DPS. In addition,
the company wants to maintain its target capital structure (60% equity, 40% debt) and its $10
million capital budget. What is the minimum dollar amount of new common stock the company
would have to issue in order to meet all of its objective?

g. now consider the case in which Buena Terra’s management wants to maintain the $3 DPS
and its target capital structure but also wants to avoid issuing new common stock. The company
is willing to cut its capital budget in order to meet its other objective. Assuming the company’s
projects are divisible, what will be the company’s capital budget for the next year?

h. if a firm follows the residual distribution policy, what actions can it take when its forecasted
retained earnings are less than the retained earnings requaried to fund its capital budget?