BF3326 – Corporate Finance

Tutorial Questions
Dividen and Dividen Policy

Answer ALL Questions

1. Portland Plastics Inc. has the following data. If it follows the residual dividend model, what is its
forecasted dividend payout ratio?

Capital budget $12,500

% Debt 40%
Net income (NI) $11,500

2. Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per
share. If the firm's total market value is unchanged by the split, what will the stock price be following
the split?

3. Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90
per share. The firm's total market value was unchanged by the split. Other things held constant, what
is the best estimate of the stock's post-split price?

4. Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital
structure of 40% debt and 60% equity, and it also wants to pay a dividend of $225,000. If the company
follows the residual dividend model, how much net income must it earn to meet its investment
requirements, pay the dividend, and keep the capital structure in balance?

5. Ring Technology has a capital budget of $850,000, it wants to maintain a target capital structure of
35% debt and 65% equity, and it also wants to pay a dividend of $400,000. If the company follows
the residual dividend model, how much net income must it earn to meet its capital budgeting
requirements and pay the dividend, all while keeping its capital structure in balance?

6. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure
of 45% debt and 55% equity, and she also wants to pay a dividend of $500,000. If the company follows
the residual dividend model, how much income must it earn, and what will its dividend payout ratio
be?

7. Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its
forecasted net income is $550,000, and its board of directors has decreed that no new stock can be
issued during the coming year. If the firm follows the residual dividend model, what is the maximum
capital budget that is consistent with maintaining the target capital structure?

8. Torrence Inc. has the following data. If it uses the residual dividend model, how much total
dividends, if any, will it pay out?

Capital budget $1,000,000

% Debt 60%
Net income (NI) $625,000
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BF3326 – Corporate Finance
Tutorial Questions
Dividen and Dividen Policy

9. Hadron NY Fashions has the following data. If it follows the residual dividend model, how much
total dividends, if any, will it pay out?

Capital budget $1,500,000

% Debt 65%
Net income (NI) $550,000

10. Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend
model, what will its dividend payout ratio be?

Capital budget $5,000

% Debt 45%
Net income (NI) $5,300

11. Moving Company has the following data, dollars in thousands. If it follows the residual dividend
model, what will its dividend payout ratio be?

Capital budget $5,000

% Debt 45%
Net income (NI) $7,000

12. New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its
forecasted dividend payout ratio?

Capital budget $7,500

% Debt 35%
Net income (NI) $6,500

13. The Ross-Jordan Financial has suffered losses in recent years, and its stock currently sells for only
$0.50 per share. Management wants to use a reverse split to get the price up to a more “reasonable”
level, which it thinks is $25 per share. How many of the old shares must be given up for one new
share to achieve the $25 price, assuming this transaction has no effect on total market value?

14. The Readata Corporation practices a strict residual dividend policy and maintains a capital structure of 60
percent debt, 40 percent equity. Earnings for the year are $5,000. What is the maximum amount of capital
spending possible without selling new equity? Suppose that planned investment outlays for the coming
year are $12,000. Will Readata be paying a dividend? If so, how much?

15. Red Zeppelin Corporation follows a strict residual dividend policy. Its debt–equity ratio is 2.5.
• If earnings for the year are $190,000, what is the maximum amount of capital spending possible with
no new equity?
• If planned investment outlays for the coming year are $760,000, will Red Zeppelin pay a dividend? If
so, how much?
• Does Red Zeppelin maintain a constant dividend payout? Why or why not?

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