DIVIDEND PRACTICE PROBLEMS

(1) Anderson Inc. has 600,000 shares of common stock outstanding, and its EPS are
$6. The firm has a dividend 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 stock

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

Capital Gains versus Income. Consider four different stocks, all of which have a
required return of 15 percent and a most recent dividend of $3.75 per share. Stocks W,
X, and Y are expected to maintain constant growth rates in dividends for the
foreseeable future of 10 percent, 0 percent, and −5 percent per year, respectively. Stock
Z is a growth stock that will increase its dividend by 20 percent for the next two years
and then maintain a constant 5 percent growth rate thereafter. What is the dividend
yield for each of these four stocks? What is the expected capital gains yield? Discuss
the relationship among the various returns that you find for each of these stocks.

We are asked to find the dividend yield and capital gains yield for each of the stocks. All
of the stocks have a required return of 15 percent, which is the sum of the dividend yield
and the capital gains yield. To find the components of the total return, we need to find
the stock price for each stock. Using this stock price and the dividend, we can calculate
the dividend yield. The capital gains yield for the stock will be the total return (required
return) minus the dividend yield.

W: P0 = D0(1 + g) / (R – g) = $3.75(1.10) / (.15 – .10) = $82.50

Dividend yield = D1 / P0 = $3.75(1.10) / $82.50 = .05, or 5%

Capital gains yield = .15 – .05 = .10, or 10%

X: P0 = D0(1 + g) / (R – g) = $3.75 / (.15 – 0) = $25.00

Dividend yield = D1 / P0 = $3.75 / $25.00 = .15, or 15%

Capital gains yield = .15 – .15 = 0%

Y: P0 = D0(1 + g) / (R – g) = $3.75(1 – .05) / (.15 + .05) = $17.81

Dividend yield = D1 / P0 = $3.75(.95) / $17.81 = .20, or 20%

Capital gains yield = .15 – .20 = –.05, or –5%

Z: P2 = D2(1 + g) / (R – g) = D0(1 + g1) 2 (1 + g2) / (R – g2)

P2 = $3.75(1.20)2 (1.05) / (.15 – .05) = $56.70

P0 = $3.75 (1.20) / (1.15) + $3.75 (1.20)2 / (1.15)2 + $56.70 / (1.15)2 = $50.87

Dividend yield = D1 / P0 = $3.75(1.20) / $50.87 = .088, or 8.8%

Capital gains yield = .15 – .088 = .062, or 6.2%

In all cases, the return is 15 percent, but the return is distributed differently between
current income and capital gains. High growth stocks have an appreciable capital gains
component but a relatively small current income yield; conversely, mature, negative-
growth stocks provide a high current income but also price depreciation over time.
 Short Term Financing Accounts Receivable

A company has total credit sales of Php 8,000,000 and its average collection period is
90 days. Past experience indicates that the bad debt loss was 2% and collection and
administration cost is 200, 000. The factor charges 3% commission and advances up to
90% at 15% interest. How much the company will get as advance and what is the
effective interest rate of factoring the A/R?

Brawny Company factored P8,000,000 of accounts receivable to a finance entity at the

beginning of the current year. Control was surrendered by Brawny Company. The factor
assessed a fee of 5% and retained a holdback equal to 10% of the accounts receivable.
In addition, the factor Accounts receivable
charged 15% interest computedfactored
on a weighted average time to
maturity of the accounts receivable of 30 days.
8,000,000
Interest
1. What amount was initially received by Brawny Company from the factoring?
(8,000,000x15%x30/365)
(98,630)
Holdback (8,000,000 x 10%)
(800,000)
Finance fee ( 8,000,000 x 5%)
2. Assuming all accounts receivable are collected, what is the cost of factoring?
(400,000)
Interest
Cash initially received from
(8,000,000x15%x30/365)
factoring 6,701,370
98,630
Finance fee ( 8,000,000 x 5%)
400,000
Cost of factoring
498,630