Question 1

What does the term Record Date for dividends refer to?

Accepted Answer

The record date for dividends refers to the date on which the names of the company owners who will receive dividends appear in the company share register. This is important as only shareholders who are recorded as owners on the record date will receive the dividend payment.

Question 2

Sunshine Day Care Inc.'s balance sheet indicates that it has current assets of $40,000, Capital Assets net of depreciation of $150,000, current liabilities of $23,000, long-term liabilities of $54,000, paid-in capital of $60,000 worth of common shares and $53,000 in retained earnings. Assuming the book value is a reliable indication of market value of the assets, how much is the maximum dividend that the shareholders can legally vote for themselves?

Accepted Answer

The maximum dividend that shareholders can legally vote for themselves is the amount left after all liabilities have been paid off. Thus, the total assets available for distribution is $40,000 + $150,000 = $190,000. Subtracting the total liabilities of $23,000 + $54,000 = $77,000 from the total assets gives us $190,000 - $77,000 = $113,000. However, since the paid-in capital of $60,000 worth of common shares has already been accounted for, the maximum dividend available is $53,000 in retained earnings.

Question 3

Michael can choose to hold 500 shares trading for $62.50 in Company A or 1,000 shares trading in Company B trading for $31.25 each. Both companies announced their earnings on December 31st at $5.00 per share and $2.50 per share, respectively. Company A's payout ratio is 100%. Company B will retain 100% of its earnings this year. Next year it will return to its usual 100% payout ratio. (Company B's common share dividend is not cumulative). Both companies return 8% to their common shareholders. Michael will by bonds with any cash received from dividends, providing an interest income at 8%. He faces a marginal income tax rate of 40% and a dividend tax rate of 37%. Assuming Michael does not liquidate his investments, which company will provide him the higher after tax income at the end of the second year?

Accepted Answer

A

Question 4

When managers and executives know more about the future plans of a company than its shareholders, what is this phenomenon called?

Accepted Answer

This phenomenon is called information asymmetry, which refers to a situation in which one party in a transaction has more or better information than the other party. In this case, the managers and executives have information that the shareholders do not, which can put the shareholders at a disadvantage. Insider trading refers specifically to the illegal use of insider information for financial gain. The other options are not commonly used terms.

Question 5

CapiCal Industries Inc. is hoping to sell its upcoming share issue to its current investor base which includes funds that generate income and those whose income is derived from dividends. In determining a payout ratio that will suit its investors, what is CapiCal is considering?

Accepted Answer

CapiCal is considering the Clientele Effect, which refers to the idea that a company's investor base is composed of specific types of investors who have certain preferences regarding financial policies such as payout ratios. By considering the preferences of its current investors, CapiCal can determine an appropriate payout ratio that will appeal to its investor base and potentially attract new investors with similar preferences. The Priority Segment, Agency Target, Key Stakeholders, and Investor Impact are not relevant concepts in this context.

Question 6

A major forest products company with a cost of capital of 12% has raised $15 million in financing and is considering three projects that are divisible, are not mutually exclusive and will have no residual value at the end of their 10 year term. Project A will cost a company $12 million providing $2.45 million in annual income before depreciation. Project B, costing $10.8 million, has annual projected savings before depreciation of $1.8 million. Project C costs $7.3 million and will bring in $1.7 million annually before depreciation. Assuming markets operate in the theoretical Modernist manner, if the company expects to earn a 12% return on their investments, in which project(s) should the company invest?

Accepted Answer

To determine which projects the company should invest in, we calculate the return on investment (ROI) for each project. The ROI is calculated as the annual income or savings divided by the project cost.- Project A: ROI = $2.45 million / $12 million = 20.42%- Project B: ROI = $1.8 million / $10.8 million = 16.67%- Project C: ROI = $1.7 million / $7.3 million = 23.29%Since all projects have an ROI greater than the company's cost of capital (12%), the company should invest in all projects that it can afford with the $15 million financing. However, the company cannot afford all three projects outright as their total cost exceeds $15 million. Therefore, the company should prioritize the projects with the highest ROI.Project C has the highest ROI, followed by Project A, and then Project B. The company can afford to invest in all of Project A ($12 million) and all of Project C ($7.3 million) if only considering these two, but since the total exceeds the available $15 million, this scenario is not possible without additional constraints. Given the options, the best choice within the provided context is to invest in all of Project A and all of Project C, as they offer higher returns than Project B within the constraint of the available financing. This analysis assumes the projects are divisible and not mutually exclusive, but the total investment should not exceed the available financing. The correct choice, based on maximizing ROI within the financing limit, is to select projects with the highest individual ROIs, which are A and C. However, the initial analysis mistakenly overlooked the financing constraint when suggesting both A and C could be fully funded. Given the financing limit, the company must prioritize based on ROI and available funds, leading to a reconsideration of how to allocate the $15 million effectively.

Question 7

If a company has 14 million common and 5 million preferred shares outstanding with dividend per share of $2.8, reported earnings of $70 million and a dividend payout ratio of 25%, what was the dividend paid per share?

Accepted Answer

First, you need to determine the total dividend payment, which is calculated as ($2.8 dividend per share) x (14 million common shares) x (25% dividend payout ratio) = $9.8 million.

Next, you need to determine the number of outstanding shares eligible to receive the dividend, which is calculated as (14 million common shares + 5 million preferred shares) = 19 million shares.

Finally, you can calculate the dividend per share by dividing the total dividend payment by the number of outstanding shares eligible to receive it: $9.8 million / 19 million shares = $0.516 per share. Rounded to the nearest cent, the dividend paid per share is $1.00, so the best choice is B.

Question 8

ABC is selling for $45.60 and is expected to continue its 5.5% growth rate in dividends. Using the Dividend Growth model, what is its expected dividend if its target return to investors is 18%?

Accepted Answer

The answer of ABC is selling for $45.60 and is...

Question 9

Using a Fair Value Balance Sheet, a company's financial position is as follows: cash of $30,000, total assets, net of cash, of $330,000, total debt of $200,000 and $160,000 worth of owners' equity, comprised of 100,000 common shares and $60,000 of retained earnings. If the company pays out its total cash in dividends, what happens to a shareholder's financial position?

Accepted Answer

Paying out dividends reduces the company's cash and retained earnings but does not change the overall financial position of the shareholder. The decrease in share value due to the reduction in assets (cash) is offset by the dividend received.

Question 10

After being spun-off by a venture capital company, Web Dynamics Ltd., an e-commerce site design company, has had difficulty finding debt financing due to high rates of its hardware and software obsolescence. How much dividends should Web Dynamics pay out?

Accepted Answer

Given Web Dynamic's difficulty finding debt financing, it would be in their best interest to retain the earnings and use them for reinvestment in the company. This will allow them to upgrade their technology and remain competitive in the market. Paying out high dividends would reduce the amount of cash available for reinvestment, making it harder for the company to keep up with competitors in terms of technology advancements.

Question 11

Beryl Corporation has 15 million common shares outstanding trading on October 1 at a cum dividend price of $22.15 a share. Its EPS at that time, the end of the third quarter, is $1.80 per share. If the ex dividend price drops to $21.95 on Oct. 2, what dividend was declared?

Accepted Answer

The drop in price from $22.15 to $21.95 indicates a dividend of $0.20 per share was declared. With 15 million shares, the total dividend is 15 million * $0.20 = $3 million.

Question 12

What does the Modernist (Modigliani and Miller) view of dividend policy say about a higher payout ratio if taxes are ignored?

Accepted Answer

The answer of What does the Modernist (Modigliani and Miller)...

Question 13

A company's shares trade at a P/E ratio of 10 and have a consistent growth in earnings of 4.5%. The company has a 30% payout ratio and dividends are paid at the end of each year. In December the company declared its dividend based on an EPS of $6.50. When the markets opened in January and investor purchased 100 shares. The investor's marginal tax rate is 42%. The dividend tax rate is 36%. Capital gains tax applies. If the entire investment is sold at the end of the year and the investor requires a 10% return, what is the after-tax net present value of her investment?

Accepted Answer

The investor's after-tax dividend is calculated by multiplying the dividend per share by (1 - dividend tax rate). The capital gain is calculated by subtracting the purchase price from the selling price, and then applying the capital gains tax. The NPV is calculated by discounting the after-tax cash flows at the required rate of return.

Question 14

Which of the following do the Modernists accept as the best measure of improving shareholder wealth?

Accepted Answer

The Modernists accept NPV (Net Present Value) as the best measure of improving shareholder wealth because it takes into account the time value of money and helps to determine whether an investment or a project provides a return greater than the required rate of return. ROE (Return on Equity), ROCE (Return on Capital Employed), Dividend payout, and Dividend yield are important measures but they do not take into account the time value of money or the risk associated with an investment or a project.

Question 15

The PetroTracking and Extraction Ltd.'s, a Calgary-based company, is experiencing double-digit growth in earnings. Given that its Board of Directors has adopted a traditional view of dividend policy, what should the company's dividend policy be?

Accepted Answer

The answer of The PetroTracking and Extraction Ltd.'s, a Calgary-based...

Question 16

RAJ Industries earned an income of $4,000,000 and distributed $850,000 as dividends. A year later, earnings had risen by 5% and RAJ distributed earnings of $700,000. What may investors have concluded about RAJ?

Accepted Answer

The answer of RAJ Industries earned an income of $4,000,000...

Question 17

How is a dividend is paid out?

Accepted Answer

Dividends can be paid out in various forms including cash, common shares, and other assets, depending on the company's dividend policy.

Question 18

Which is the minimum assumption that must exist to support the Modernist view that dividend policy should have no effect on shareholder wealth?

Accepted Answer

The Modernist view, as encapsulated in the Modigliani-Miller theorem on dividend policy, assumes perfect capital market efficiency. This means there are no taxes, no transaction costs, and that all investors have access to the same information, among other conditions, to conclude that dividend policy does not affect shareholder wealth.

Question 19

Felicity Trust has a dividend cover ratio of 5.0 on net income of $6.3 million. The company's EPS is $2.10 and its cum dividend price is $22.50. What is the expected ex dividend price of the shares?

Accepted Answer

The expected ex-dividend price of the shares can be calculated by subtracting the dividend per share from the cum dividend price. The dividend cover ratio is given as 5.0, which means the net income covers the dividend 5 times. With a net income of $6.3 million and an EPS of $2.10, we can calculate the total number of shares as $6.3 million / $2.10 = 3 million shares. The total dividend paid is then $6.3 million / 5 = $1.26 million. The dividend per share is $1.26 million / 3 million shares = $0.42. Subtracting this from the cum dividend price gives $22.50 - $0.42 = $22.08.

Question 20

What does the traditional view of dividend policy say about a higher payout ratio?

Accepted Answer

The traditional view of dividend policy suggests that a higher payout ratio increases the share value because investors perceive less risk and demand a lower rate of return when dividends are more certain.

Quiz 11: Developing a Dividend Policy