Dividend Policy Problems - 2

Problem 7
X and Y are two fast growing companies in the engineering industry. They are close competitors and
their asset composition, capital structure, and profitability records have been very similar for several
years. Their recent earnings per share, dividend per share and share price history are as follows:

Year Company X Company Y

EPS(Tk.) DPS(Tk.) Price range(Tk.) EPS(Tk.) DPS(Tk.) Price range(Tk.)

1 9.30 2.00 75-90 9.50 1.90 60-80

2 7.40 2.00 55-80 7.00 1.40 25-65

3 10.50 2.00 70-110 10.50 2.10 35-80

4 12.75 2.25 85-135 1225 2.45 80-120

5 20.00 2.25 135-200 20.25 4.05 110-225

6 16.00 2.50 150-190 17.00 3.40 140-180

7 19.00 2.50 155-210 20.00 4.00 130-190

Required:
1. Determine the D/P ratio and P/E ratio for both the companies for all the years.
2. Determine the average D/P ratio and P/E ratio for both the companies over the period 1 through 7.
3. The management of company Y is puzzled as to why their share prices are lower than those of
company X, in spite of the fact that profitability record of the company Y is slightly better( particularly of
past three years). As a financial manager, how would you explain the situation?

Effect of issuing bonus shares

The declaration of the bonus share will increase the paid up share capital and reduce the reserves and
surplus (retained earnings).The total net worth is not affected by the bonus issue. It is merely an
accounting transfer from reserves and surplus to paid up capital.

Problem 8
ABC Ltd has a capital structure shown below:

Equity share capital (5,00,000 shares @ Tk 10 each Tk 50,00,000

Pref. share capital (50,000, shares @ Tk 100each 50,00,000
Share premium 50,00,000
R&S 80,00,000
 2,30,00,000
How would the capital structure be affected if the company splits its stock five for one?
Show the changed capital structure if the company declares a bonus shares in the ratio of one for five
(1:5) to ordinary shareholders when the issue price per share is Tk. 100.

Solution
Changed capital structure after share split
Equity share capital (25,00,000 shares @ Tk 2per share) Tk. 50,00,000
Pref. share capital (50,000 shares 2 Tk. 100 each) 50,00,000
Share premium 50,00,000
R&S 80,00,000
Net worth 2,30,00,000

Workings:
Bonus shares =5,00,000÷5 = 1,00,000 or (5,00,000×20% = 1,00,000)
Value of bonus shares = 1,00,000 x 100 = 1,00,00,000
Adjustment: From R & S Tk. 80,00,000; and from share premium 20,00,000

Changed capital structure after bonus issue

Equity capital ( 6,00,000shares @ Tk 10 each) Tk 60,00,000
Pref. share capital( 50,000 shares @ Tk 100 each) 50,00,000
Share premium ( 50,00,000-20,00,000 + 90,00,000) 1,20,00,000
R&S 0
2,30,00,000