Haulsee Inc. paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase in the quarterly dividend to $0.14. What is the effective rate of the dividend increase?

Question

Quizplus · Accepted Answer

First, we need to calculate the dividend yield before the change:

Dividend yield = (Quarterly dividend x 4) / Current stock price
Dividend yield = ($0.12 x 4) / Current stock price

Next, we need to calculate the new dividend per share after the stock dividend and increase:

New dividend per share = $0.14 + ($0.12 x 0.10)
New dividend per share = $0.14 + $0.012
New dividend per share = $0.152

Now we can calculate the new dividend yield:

New dividend yield = (New quarterly dividend x 4) / Current stock price
New dividend yield = ($0.152 x 4) / Current stock price

To determine the effective rate of the dividend increase, we can calculate the percentage increase in the dividend yield:

Effective rate of dividend increase = (New dividend yield - Old dividend yield) / Old dividend yield x 100%
Effective rate of dividend increase = (($0.152 x 4) / Current stock price - ($0.12 x 4) / Current stock price) / ($0.12 x 4) / Current stock price x 100%
Effective rate of dividend increase = ($0.032 x 4 / ($0.12 x 4)) x 100%
Effective rate of dividend increase = 33.33%

However, since the company also issued a 10% stock dividend, we need to account for the fact that there are now more shares outstanding. This means that the dividend per share will be spread out over more shares, resulting in a lower dividend per share even though the total amount paid out may be higher.

To adjust for the stock dividend, we need to divide the new dividend yield by the stock dividend factor, which is 1 + 0.10 = 1.10.

Adjusted new dividend yield = New dividend yield / Stock dividend factor
Adjusted new dividend yield = (($0.152 x 4) / Current stock price) / 1.10

Now we can recalculate the effective rate of the dividend increase:

Effective rate of dividend increase = (Adjusted new dividend yield - Old dividend yield) / Old dividend yield x 100%
Effective rate of dividend increase = ((($0.152 x 4) / Current stock price) / 1.10 - ($0.12 x 4) / Current stock price) / ($0.12 x 4) / Current stock price x 100%
Effective rate of dividend increase = ($0.115 x 4 / ($0.12 x 4)) x 100%
Effective rate of dividend increase = 28.33%

Therefore, the effective rate of the dividend increase is 28.33%, which is closest to choice C.