Question 1

Bavarian Brewhouse had aftertax earnings of $1,500,000 in 2004.The company needs $2,500,000 for new investments and plans to finance 60% of those investments with debt.If Bavarian Brew follows a residual dividend policy,what total dividend will be paid?

Accepted Answer

amount of debt to be raised: 2,500,000(.6)= 1,500,000
equity needed: 1,000,000
amount available for dividends = 1,500,000 - 1,000,000 = 500,000

Question 2

Smith Enterprises just paid a 10% stock dividend.If the market price of the stock was $18 per share before the stock dividend,what do you expect it to be afterwards?

Accepted Answer

18/(1+.1)= 16.36

Question 3

The date on which all the stockholders are determined that are eligible to receive a dividend is called the ...

Accepted Answer

The date of record is the date on which all the stockholders are determined that are eligible to receive a dividend. The announcement date is when the company announces the amount of the dividend, and the payment date is when the dividend is actually paid out to the eligible stockholders.

Question 4

You own stock in a company that just announced a 1-3 reverse stock split.If shares currently trade at $15 a share,what should the stock price be after the reverse stock split?

Accepted Answer

15(3)= 45

Question 5

A dividend policy where the company pays out a fixed percentage of their earnings is called a

Accepted Answer

A constant payout ratio policy is a dividend policy where the company pays out a fixed percentage of their earnings. This policy allows for the company to adjust their dividend payments as their earnings fluctuate, keeping the percentage constant. A constant nominal payout policy (A) is a dividend policy where the company pays out a fixed dollar amount per share, regardless of their earnings. A target dividend payout ratio policy (B) is a policy where the company sets a target payout ratio, but may adjust the actual dividend payment each period based on their earnings. A low-regular and extra policy (D) is a policy where the company pays a low, regular dividend, but also has the flexibility to pay out additional dividends if earnings allow.

Question 6

Bavarian Brewhouse had earnings per share of $2.50 in 2004 and paid out a dividend per share of $1.45 that same year. Earnings per share are expected to be $3.25 in 2005.
-What was Bavarian Brewhouse's dividend payout ratio in 2004?

Accepted Answer

1.45/2.50 = .58

Question 7

You own stock in a company that just announced a 3-1 stock split.If shares currently trade at $15 a share,what should the stock price be after the stock split?

Accepted Answer

15/3 = 5

Question 8

Suppose Joe Palooka bought 1000 shares of Southern Overnight Overland Interstate Express (SOOIE) one year ago for $45 per share. Mr. Palooka received a $2 per share dividend, and SOOIE shares have increased to $49.50. Joe needs to adjust his portfolio, so he sells his SOOIE shares.
-Refer to SOOIE.What is his after tax return if he faces a 15% tax rate on dividends and capital gains?

Accepted Answer

Joe's total return includes both the dividend income and the capital gain. The dividend income is $2 per share, and the capital gain is $49.50 - $45 = $4.50 per share. The total pre-tax return per share is $2 + $4.50 = $6.50. The after-tax dividend is $2 * (1 - 0.15) = $1.70, and the after-tax capital gain is $4.50 * (1 - 0.15) = $3.825. The total after-tax return per share is $1.70 + $3.825 = $5.525. The after-tax return percentage is ($5.525 / $45) * 100% = 12.28%.

Question 9

Extruded Elements
Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends
-What is Extruded Elements' expected dividend next year?

Accepted Answer

The expected dividend next year can be calculated by first determining the expected earnings for next year, then applying the 30% payout ratio. Given the long-term earnings growth rate is consistent with the increase from $25,000,000 to $26,250,000, this is a 5% growth rate ($1,250,000 / $25,000,000). Applying this 5% growth rate to this year's earnings of $26,250,000 gives next year's expected earnings as $27,562,500 ($26,250,000 * 1.05). 30% of $27,562,500 is $8,268,750. Dividing this by the 4,000,000 shares outstanding gives a dividend of $2.07 per share.

Question 10

Bavarian Brewhouse had earnings per share of $2.50 in 2004 and paid out a dividend per share of $1.45 that same year. Earnings per share are expected to be $3.25 in 2005.
-If Bavarian Brewhouse follows a constant nominal dividend policy what will be the dividend per share in 2005?

Accepted Answer

A constant nominal dividend policy means the company pays out the same dividend amount per share each year, regardless of its earnings. Therefore, the dividend per share in 2005 will remain $1.45, as it was in 2004.

Question 11

Bavarian Brewhouse had earnings per share of $2.50 in 2004 and paid out a dividend per share of $1.45 that same year. Earnings per share are expected to be $3.25 in 2005.
-If Bavarian Brewhouse follows a constant payout ratio dividend policy,what will be the dividend per share in 2005?

Accepted Answer

d = 1.45/2.50 = .58
DPS = 3.25(.58)= $1.89

Question 12

Smith Enterprises declares a 4-1 stock spilt.If you own 600 shares of Smith stock,how many share do you own after the split?

Accepted Answer

600(4)= 2400

Question 13

Suppose Joe Palooka bought 1000 shares of Southern Overnight Overland Interstate Express (SOOIE) one year ago for $45 per share. Mr. Palooka received a $2 per share dividend, and SOOIE shares have increased to $49.50. Joe needs to adjust his portfolio, so he sells his SOOIE shares.
-Refer to SOOIE.What is his after tax return if he faces a 33% tax rate on dividend income and a 5% tax rate on capital gains?

Accepted Answer

The after-tax return is calculated as follows:Dividend income: $2 per share x 1000 shares = $2,000Tax on dividend income: $2,000 x 33% = $660After-tax dividend income: $2,000 - $660 = $1,340Capital gains: ($49.50 - $45) per share x 1000 shares = $4,500Tax on capital gains: $4,500 x 5% = $225After-tax capital gains: $4,500 - $225 = $4,275Total after-tax return: $1,340 + $4,275 = $5,615After-tax return percentage: $5,615 / $45,000 (initial investment) x 100% = 12.48%

Question 14

The situation where a company replaces a certain number of shares with just one share is called a

Accepted Answer

A reverse stock split reduces the number of shares outstanding by consolidating them into fewer shares, effectively the opposite of a stock split.

Question 15

Extruded Elements
Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends
-If Extruded Elements increases its payout ratio to 40% of earnings next year,but its expected growth rate remains constant,what is its expected dividend?

Accepted Answer

The answer of Extruded Elements
Extruded Elements had Net Income of...

Question 16

The dividend policy model that assumes that managers use dividends to covey positive information to shareholders is called the ...

Accepted Answer

The signaling model suggests that managers use dividends as a signal to communicate positive information about the company's financial health and future prospects to shareholders. This model assumes that investors view dividend payments as an indication of a firm's financial health, and that managers will only pay dividends if they believe the company is financially stable and has positive growth prospects. The agency cost model focuses on the conflict of interest between managers and shareholders, while the contracting cost model suggests that dividends are used to reduce the costs associated with monitoring managerial behavior.

Question 17

Which of the following is not considered a factor in determining a company's dividend payout ratio?

Accepted Answer

All of the options listed (industry growth rate, capital investment needs, and profitability) are factors that can influence a company's dividend payout ratio. Therefore, none of them is not considered a factor.

Question 18

Smith Enterprises reports earnings per share for 2004 of $3.75 and dividends per share for the same year of $1.65.What percentage of earnings will be kept in the company as retained earnings?

Accepted Answer

1.65/3.75 = .44
retention = 1-.44 = .56

Question 19

Extruded Elements
Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends
-The required rate of return on Extruded's shares is 13%.What is the share price today based on the Gordon growth model?

Accepted Answer

The answer of Extruded Elements
Extruded Elements had Net Income of...

Question 20

Smith Enterprises reports earnings per share for 2004 of $3.75 and dividends per share for the same year of $1.65.What is Smith's dividend payout ratio?

Accepted Answer

1.65/3.75 = .44

Quiz 14: Payout Policy