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Investments An Introduction 12th Edition Mayo Solutions Manual
Investments An Introduction 12th Edition Mayo Solutions Manual
QUESTIONS
8-6. Cash dividends are paid in cash while stock dividends are
paid in additional shares. Both stock dividends and stock
splits alter the number of shares outstanding and the stock's
price. Stock dividends and stock splits do not alter the firm's
assets, liabilities, total equity, or earning capacity. The
difference between a stock dividend and a stock split is
essentially the difference in how accountants alter the equity
section of a firm’s balance sheet.
c. Stock splits are not subject to income tax. The price of the
stock adjusts for the split and the investor’s cost basis is
allocated over the original shares and the new shares.
d. Stock repurchases result in capital gains and the gains only
apply to the individual selling the stock and not all of the
corporation’s stockholders. The individual does not have to
sell the shares back to the firm, so the tax may be deferred
until the shares are ultimately sold.
Since activity ratios show how rapidly assets flow through the
firm, they like liquidity ratios give an indication of the
firm's capacity to meet its current obligations as they come
due. More rapid turnover generates the cash to meet current
liabilities on a timely basis.
1. a.
Per
End of Price of Total Share Dividend Shares Bought
Year Stock Shares Dividend Reinvested Through Reinvested
Owned Dividends
(Beginning of
the year)
0 40 2.000
1 40 100.000 2.000 200.00 5.000
2 40 105.000 2.000 210.00 5.250
3 40 110.250 2.000 220.50 5.513
4 40 115.763 2.000 231.53 5.788
5 40 121.551 2.000 243.10 6.078
6 40 127.628 2.000 255.26 6.381
7 40 134.010 2.000 268.02 6.700
8 40 140.710 2.000 281.42 7.036
9 40 147.746 2.000 295.49 7.387
10 40 155.133 2.000 310.27 7.757
Value of Stock 162.889 62.889
Beginning Year 11: 6515.58
b.
Per
End of Price of Total Share Dividend Shares Bought
Year Stock Shares Dividend Reinvested Through Reinvested
Owned Dividends
(Beginning of
the year)
0 40.00 2.000
1 42.40 100.000 2.000 200.00 4.717
2 44.94 104.717 2.000 209.43 4.660
3 47.64 109.377 2.000 218.75 4.592
4 50.50 113.969 2.000 227.94 4.514
5 53.53 118.482 2.000 236.96 4.427
6 56.74 122.909 2.000 245.82 4.332
7 60.15 127.241 2.000 254.48 4.231
8 63.75 131.473 2.000 262.95 4.124
9 67.58 135.597 2.000 271.19 4.013
10 71.63 139.610 2.000 279.22 3.898
Value of Stock 143.508 43.508
Beginning Year 11: 10280.03
c.
Per
End of Price of Total Share Dividend Shares Bought
Year Stock Shares Dividend Reinvested Through Reinvested
Owned Dividends
0 40.00 2.000
1 42.40 100.000 2.060 206.00 4.858
2 44.94 104.858 2.122 222.49 4.950
3 47.64 109.808 2.185 239.98 5.037
4 50.50 114.845 2.251 258.52 5.119
5 53.53 119.976 2.319 278.16 5.196
6 56.74 125.162 2.388 298.90 5.268
7 60.15 130.430 2.460 320.82 5.334
8 63.75 135.764 2.534 343.96 5.395
9 67.58 141.159 2.610 368.36 5.451
10 71.63 146.610 2.688 394.06 5.501
Value of Stock 152.111 52.111
Beginning Year 11: 10896.28
8-2. a. Cash and retained earnings decline by $1,000,000 to
$19,000,000 and $97,500,000. The other entries are unaffected.
Current ratio:
20X0: $5,000 + 125,000 + 200,000$ = 1.9
$175,000
20X1: $7,000 + 130,000 + 190,000 = 1.5
$210,000
Quick ratio:
20X0: $5,000 + 125,000 = 0.74
$175,000
20X1: $130,000 = 31
$1,500,000/360
20X2: $152,000 = 32
$1,700,000/360
8-6. The firm wants to achieve the industry average given its
level of sales. Thus:
Industry average = Sales/Average inventory
4 = $500,000/X
X = $125,000
Since the firm's inventory is $200,000, the reduction in
inventory will be $200,000 - $125,000 = $75,000.
40 = X/[($42,791,000/360)]
X = $4,754,556
8-8. Operating profit margin = EBIT/Sales
Firm A: $80,000/$1,000,000 = 8%
Firm B: $45,000/$1,000,000 = 4.5%
Notice that since the preferred stock dividends are paid after
taxes, earnings per common share are lower than when debt
financing is used.
8-11. This problem serves as a review of financial ratios by
having the student compare the ratios for Chloe’sCoatS (CCS)
and Tinker’sTrouserS (TTS).
Current ratio:
current assets = $3,882 = 1.47
current liabilities $2,648
Inventory turnover:
sales = $11,649 = 8.4
average inventory ($1,329 + $1,452)/2
Receivables turnover:
annual sales = $11,649 = 11.7
accounts receivable $994
Return on assets:
earnings after taxes = $923 = 7.7%
total assets $11,983
Return on equity:
earnings after taxes = $923 = 31.7%
equity $2,911
Debt/net worth:
debt = $9,172 = 3.3
equity $2,811
Debt ratio:
debt = $9,172 = 76.5%
total assets $11,983
Times-interest-earned:
earnings before interest and taxes = $1,460 = 4.97
interest expense $294
3. The stock dividend will reduce the price of the stock by the
amount of the dividend, as the market adjusts for the
additional shares. The dividend reinvestment plan will probably
have no impact on the price of the stock. While the price of
the stock will decline when the stock goes ex dividend, that
decline is not the result of the dividend reinvestment plan.
The price of the stock may fall if the firm issues new shares
as a result of the possible dilution, and the price could fall
as a result of issuing debt if the firm is perceived as being
riskier from the increased use of debt financing.
5. Stock splits only alter the number of shares and the price
of the stock adjusts accordingly. A stock split will not help
raise additional equity financing.