Managerial Finance

Qlease C)o l+-q ? I+- lo

Chapter l4

(L+4 Stock SPlit

(1+8) Stock SPlit

o+e, Residual Disuibution

Poliry

Challenging Problems 1S-12

6r"101 Altemative oividend

Policies

{14-xL) Residual Distribution

Model

lJistubutrons to Shareholders: Dividends and Reputchases

ofeachyearitdistrilrutes5-5%oftheyear,snetinconre'Thisyear,snetitlcomewas$8rnillion. How rnuch externai equity must Gardial seek now to erpand as planned?

suppose you olfn 2,000 common shares of Laurence Incorporated. The EPS is $10'00, the

npS- i, $i.OO, and the stock sells for $80 per share. Laurence announces a 2-for-1 split' imrnecliately after the split, horv manv shares rvi.ll yotl have, what will the adusted EPS

and DPS be, and tt'hat would you expect the stock price to be?

Fauver Enterprises declare<l a 3-for-1 stock split last year, and tiris year its dividend is

$1.50 per share. This total dividend payout represellts a 6% increase over last year's pre-

spiit total rlividen<l payollt. What was last year's dividend per share?

Harris Coinpany ntust set its investurent and dividend policies for the coming year' It has

three independent projects frorn which to choose, each of lrfiich requires a $3 miliion

investment. These projects have different levels of risk and therefore dilferent costs of

capital. Their projectetl iRRs and costs of capital are as follows:

Project A:

Project B:

Project C:

Cost of capital = 17o/o; IRR = 20%

Cost of capital = 13%; IRR = 10%

Cost of capital = 7o/o; IRR = 97o

Harris intends to rnaintain its 359,o debt and 55olo cotxmon equity capital structure, and its

net income is expecterl to be g4,750,000. If Harris rnaintains its residual dividend policy

(rvith all distributions in the form of dividends), ufiat lvill its payout ratio be?

Boehn-r Corporation has had stable earnings growth of 8% a ,vear for the past I 0 years and

in 2013 goehrn paid dividends of $2,6 millioil on net income of $9.8 million' However' in

2014 earnings are expecte<l to jump to $12.6 million, and Boehm plans to invest $7'3

miilion in a piant expansion. This rtne-time unusual earnings growth won't be

rr-raintaineci, ihoogll, and after 2014 Boehm i,vill retrirn to its previous 87o earnings growth

rate. Its target debt ratio is 359'o.

a. Calcultrte Boehm's total dividenris for 2014 under each of the following policies:

(1) Its 2014 dividend payment is set to force dir.iclends to grow at the long-run growth

rate in earnlngs. (2) It continues the 20i3 dividend payout ratio' (3) It uses a pure residual policir u,ith all distributions in the forrn of diridends (35% of

the $7.3 million investment is financed witir debt)' (4) It emploirs a regular-dividend-plus-extras policy, rvith the regular dividend being

based on the long,run growth rate and the extra dividend being set according to

the residual PolicY. b. Which of the preceding policies lvould you recommeud? Restrict your choices to the

ones iisted, but justill' your answer' c. Does a2A14 clividend of $9 rnillion seem reasonable in view of your answers to parts a

and b? If not, should the dividend be higher or lou'er?

Kendra Brown is analyzing the capital requirements for"Relnolds Corporation fbr next year'

Kentira lorecasts that Reynolds r,r,ili need $1-5 million to tund ali of its positive-NPV projects,

and her iob is to determine how to raise the monev. Revnolds's uet iucome is $11 million. and

it has paid a $2 dividend per share (DPS) fbr tl-re past several years (1 ffrillion shares of

corrunon stock are outstaricling); its shareholders expect the dividend to remain constant tbr

the next several years. The company's target capital structure is 307o debt and 70o/o equitl''