DIVIDEND PRACTICE PROBLEMS

(1) Anderson Inc. has 600,000 shares of common stock outstanding, and its EPS are
$6. The firm has adividend payout ratio of 40% and the current market price of its
common stock is $75.

a) What are Anderson Inc.’s:

i.cash dividends per share

ii.total market value

iii.P/E ratio

b) Pam owns 750 shares of Anderson’s stocki.

What are Pam’s total cash dividends?

ii.What is the total market value of her stock?

c) Anderson declares a 3 for 1 stock split. Assuming the payout ratio remains the same.

i.What are Pam’s dividends per share and her total cash dividends

ii.What is the total market value of her stock?

d) Under what circumstances might an investor be better off after a stock split?

a)i.Cash dividends per share:EPS X 40% = $6x40% = $2.40

ii.Total market value: 600,000 shares x $75 = $45,000,000

iii.P/E ratio = $75/$6 = 12.50

b)i.Pam’s cash dividends = $2.40 x 750 shares = $1800

ii.Total market value of her stock: 750 shares x $75 = $56,250

c) i.3 for 1 stock split: New # of shares = 750 x 3/1 = 2250 shares. Dividends per share:
= $2.40/3 = $.80 per share. Total cash dividends = $.80 x 2250 = $1800

ii.Market value of her stock: New share price = $75 x 1/3 = $25$25 x 2250 shares =
$56,250
d) Either the dividend payout ratio has to increase or the market has to attribute positive
information to the split. A stock split can signal to the market that management expects
the share price will continue to increase.

2) UCanDoIt Inc. lists the following on its annual report. UnCanDoIt’s shares are
currently trading at $45 a share:

Common Stock (100,000 shares outstanding) $2,000,000

Retained Earnings $3,000,000

Discuss the changes that would occur to UCanDoIt’s balance sheet and share price if:

a) UCandoIt declares a 3 for 1 stock split

b) UCanDoIt declares a 20% stock dividend

UCanDoIt Inc. lists the following on its annual report. UnCanDoIt’s shares are currently
trading at $45 a share:

Common Stock (100,000 shares outstanding) $2,000,000

Retained Earnings $3,000,000

a) After a 3 for 1 stock split:

Common Stock (300,000 shares outstanding) $2,000,000
Retained Earnings$3,000,000

b) After a 20% stock dividend:

The market value of the dividends is transferred from the retained earnings
account to the common stock account. The market value of the dividends:
100,000 shares x 20% = 20,000 new shares
market value = 20,000 x $45 = $900,000
New balance sheet:
Common Stock (120,000 shares outstanding) $2,900,000
Retained Earnings $2,100,000

FYI, the new share price (market value) =$45 (1/1.20) = $37.50 (this calculation
was not required)
Capital Gains
Short Term Financing Accounts Receivable