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1. Katie Homes Co. has 14,500,000 shares outstanding. The stock is currently selling at $76 per share. If an unfriendly outside group acquired 20% of the shares, existing stockholders will be able to...

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1. Katie Homes Co. has 14,500,000 shares outstanding. The stock is currently selling at $76 per share. If an unfriendly outside group acquired 20% of the shares, existing stockholders will be able to buy new shares at 25% below the currently existing stock price.

How many shares must the unfriendly outside group acquire for the poison pill to go into effect?

Number of shares_________________

What will be the new purchase price for the existing stockholders?

New purchase price _______________

2. Mr. Meyers wishes to know how many shares are necessary to elect 6 directors out of 14 directors up for election in the Austin Power Co. There are 74,000 shares outstanding.

Number of shares ________________

3. Betsy Ross owns 942 shares in the Hanson Fabrics Co. There are 13 directors to be elected and 36,000 shares outstanding. The firm has adopted cumulative voting.

How many total votes can be cast? Total votes _________________

How many votes does Betsy control? Votes _____________________

What percentage of the total votes does she control? Percentage of votes_________________

4. Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 11 members of the are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 31,001 shares. Ms. Ramsey and her friends on the board control 51,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 29,998 shares. The company uses cumulative voting.

How many directors can Mr. Clark be sure of electing? Number of directors ________________

How many directors can Ms. Ramsey and her friends be sure of electing?

Number or directors ___________________

How many directors could Mr. Clark elect if he obtains all the proxies for the uncommitted votes?

Number of Directors___________________

Will he control the board? Yes _________________ No _______________

If nine directors were to be elected, and Ms. Ramsey and her friends had 59,001 shares and Mr. Clark had 39,001 shares plus half the uncommitted votes, how many directors could Mr. Clark elect?

Number of Directors ___________________

5. Rust Pipe Co. was established in 1994. Four years later the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders’ stock and is entitled to ten votes per share. The normally traded common stock, designated as Class B, is entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering purchasing shares in Rust Pipe Co. While he knew the existence of founders’ shares were not often present in other companies, he decided to buy the shares anyway because of a new technology Rust Pipe had developed to improve the flow of liquids through pipes.

Of the 1,800,000 total shares currently outstanding, the original founder’s family owns $2,525 shares.

What is the percentage of the founder’s family votes to Class B votes?

Percentage of votes ____________________%

6. Mr. & Mrs. Anderson own five shares of Magic Tricks Corp. common stock. The market value of the stock is $74. The Andersons also have $56 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $56 for each five shares currently owned.

What is the value of a right? Value per right _______________________

What is the value of the Andersons’ portfolio before the rights offering?

Portfolio value _______________

Compute the diluted value per share.

Diluted Value ________________

If the Andersons participate in the rights offering, what will be the value of their portfolio, based on the diluted value of the stock?

Portfolio value _______________

If they sell their two rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?

Portfolio value _______________

7. Walker tools has 5.6 million shares of common stock outstanding. The current market price of Walker common stock is $54 per share rights-on. The company’s net income this year is $18.00 million. A rights offering has been announced in which 560,000 new shares will be sold at $48.40 per share. The subscription price plus four rights is needed to buy one of the new shares

What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering?

Earnings per share _________________ Price-earnings ratio ________________

What would the earnings per share be immediately after the rights offering? What would the price-earnings ratio be immediately after the rights offering?

Earnings per share __________________Price-earnings ratio_________________

8. Enterprise Storage Company has 400,000 shares of cumulative preferred stock outstanding which has a stated dividend of $4.75. It is six years in arrears in its dividend payments.

a. How much in total dollars is the company behind in its payments? Dividend in arrears ___________

b. The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit. The common stock will pay the following dividends over the next 4 years:

D1 1.25

D2 1.50

D3 1.75

D4 2.00

The company anticipates earnings per share after 4 years will be $4.05 with P/E ratio of 12.

The common stock will be valued as the present value of future dividends plus the present value of the future stock price after 4 years. The discount rate used by investment banker is 10%.

Compute the value of the common stock. Common Stock_________________

c. How many shares of common stock must be issued at the value computed in part b to eliminate the deficit computed in part a? Number of shares of common stock ___________________

9. Ralston Gourmet Foods Inc. earned $245 million last year and retained $185 million.

What is the payout ratio? _______________________

10. Polycom Systems earned $553 million last year and paid out 25% of earnings in dividends.

By how much did company’s retained earnings increase?

Addition to retained earnings _________________

With 100 million shares outstanding and a stock price of $101, what was the dividend yield?

Dividend yield _______________

11. The following companies have different financial statistics.

Turtle Co. Hare Corp.

Growth rate in sales and earnings 24% 8%

Cash as a percentage of total assets 5 30

What dividend policy would you recommend for Turtle Co.?

Low payout ratio_____________ High payout ratio_______________

What dividend policy would you recommend for Hare Corp.?

Low payout ratio_____________ High payout ratio_______________

12. Planetary Travel Co. has $210,000,000 in stockholders’ equity. Common stock is $40,000,000 and the balance is retained earnings. The firm has $295,000,000 in total assets and 4% of this value is in cash. Earning for the year are $21,000,000 and are included in retained earnings.

a. What is the legal limit on current dividends? ____________________________

b. What is the practical limit based on liquidity? ___________________________

c. If the company pays out the amount in part b, what is the dividend payout ratio?

13. A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage I. During the growth stage II, she anticipates 18% of earnings will be distributed as dividends. As the firm progresses to the expansion stage III, the payout ratio will go up to 33% and eventually reach 60% during the maturity stage IV.

Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share during each stage

Dividends

Stage I .30 Stage I ________________

Stage II 1.80 Stage II _______________

Stage III 2.40 Stage III _______________

Stage IV 3.20 Stage IV _______________

Assume in Stage IV that an investor owns 275 shares and is in a 25% tax bracket. What will be the investor’s aftertax income from the cash dividend? Aftertax income____________________

In what two stages is the firm most likely to utilize stock dividends or stock splits?

Stage I____________ Stage II ____________ Stage III__________ Stage IV_____________

14. Squash Delight Inc. has the following balance sheet:

Assets

Cash $ 25,000

Accounts receivable 360,000

Fixed assets 965,000

Total assets 1,350,000

Liabilities

Accounts payable 261,000

Notes payable 57,000

Common stock (100,000 shares @ $2 par) 200,000

Capital in excess of par 100,000

Retained earnings 732,000

Total liabilities & owners’ equity 1,350,000

The firm’s stock sells for $9 a share

Show the effect on the capital accounts of a two-for-one stock split.

Effect of Stock Split

Common stock

Capital excess of par

Retained earnings

Total equity

Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends? Stock dividend ____________ Stock split ____________

15. In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two plans. The values represent dividends per share.

Year Plan A Plan B

1 $ 1.50 $ .50

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

How much in total dividends per share will be paid under each plan over five years?

Total Dividends

Plan A

Plan B

Mr. Bright the vice president of finance suggests that stockholders often prefer a stable dividend policy to a highly variable one. He will assume that stockholders apply a lower discount rate to dividends that are stable. The discount rate to be used for Plan A is 10%; the discount rate for Plan B is 14%. Compute the present value of future dividends.

Present Value of Future Dividends

Plan A

Plan B

Which plan will provide the higher present value for the future dividends? Plan A _____Plan B_____

16. The stock of Pills Berry Company is currently selling at $95 per share. The firm pays a dividend of $3.10 per share.

What is the annual dividend yield? Dividend yield ____________%

If the firm has a payout rate of 50%, what is the firm’s P/E ratio? P/E ratio _____________times

17. The shares of the Dyer Drilling Co. sell for $50. The Firm has a P/E ratio of 25. 40% of earnings is paid out in dividends.

What is the firm’s dividend yield? Dividend Yield ______________%

18. The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $5 per share.

Common stock (50,000 shares at $2) $ 100,000

Capital in excess of par 100,000

Retained earnings 250,000

Total equity 450,000

The firm intends to first declare a 10% stock dividend and then pay a 20-cent cash dividend.

Show the capital section of the balance sheet after the first transaction and then after the second transaction.

Western Pipe Co.

After Stock Dividend

Common Stock

Capital in excess of par

Retained earnings

Total equity

Western Pipe Co.

After Stock Dividend

Common stock

Capital in excess of par

Retained earnings

Total equity

19. Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year. Assume its balance sheet is as follows:

Assets

Cash $ 407,000

Accounts receivable 889,000

Fixed Assets 1,083,000

Total Assets $ 2,379,000

Liabilities and Stockholders’ Equity

Accounts payable $ 499,000

Long term payable 321,000

Common stock (275 shares at $1 par) $ 275,000

Retrained earnings 1,284,000

Total Liabilities and stockholders’ equity 2,379,000

From a legal perspective, what is the maximum amount of dividends per share the firm could pay?

Dividends per share __________________

Is this realistic? Yes _________ No ____________

In terms of cash availability, what is the maximum amount of dividends per share the firm could pay?

Dividends per share _______________

Assume the firm earned an 15% return on stockholders’ equity last year. If the board wishes to pay out 60% of earnings in the form of dividends, how much will dividends per share be?

Dividends per share ___________________

20. Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.

Po = D1_____

Ke - g

P0 = Price of the stock today

D1 = Dividend at the end of the first year

D1 = D0 x (1+g)

D0 = Dividend today

Ke = Required rate of return

g = Constant growth rate in dividends

D0 is currently $3.50 Ke is 9%, and g is 5%

Under Plan A, D0 would be immediately increased to $4.00 and Ke and g will remain unchanged.

Under Plan B, D0 will remain at $3.50 but g will go up to 6% and Ke will remain unchanged.

Compute P0 under Plan A. Note D1 will be equal to D0 x (1 = g) or $ XXXXXXXXXXKe will equal 9%, and g will equal 5%. Stock price for Plan A _________________

Compute P0 under Plan B. Note D1 will be equal to D0 x (1 + g) or $ XXXXXXXXXXKe will b equal to 9%, and g will be equal to 6%. Stock price for Plan B _________________

Which plan will produce the higher value? Plan A ___________ Plan B ___________

21. Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $45 to $70 per share. The firm’s current statement of stockholders’ equity is as follows:

Common stock (2 million shares issued at par value of $10 per share) $20,000,000

Paid-in-capital in excess of par 10,000,000

Retained earnings 45,000,000

Net worth 75,000,000

How many shares would be outstanding after a two-for-one stock split?

Number of shares ____________________

What would be its par value? Par value ______________

How many shares would be outstanding after a three-for-one stock split?

Number of shares _________________

What would be its par value? Par value ______________

EPS before

EPS after 2-for-1 split

EPS after 3-for-1 split

What would be the price per share after the two-for-one stock split? After the three-for-one stock split?

Price after 2-for-1 split

Price after 3-for-1 split

22. Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend,

The capital accounts for the firm are as follows:

Common stock (3,000,000 shares at $5 par) $ 15,000,000

Capital in excess of par* 4,000,000

Retained earnings 24,000,000

Net worth $ 43,000,000

*The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times.

The company’s stock is selling for $40 per share. The company had total earnings of $12,000,000 during the year. With 3,000,000 shares outstanding, earnings per share were $4. The firm has a P/E ratio of 10.

What adjustments would have to be made to the capital accounts for a 10% stock dividend?

Common Stock __________ Capital in excess of par __________

Retain earnings _________ New Worth ____________

What adjustment would be made to EPS and the stock price? EPS _________Stock price _________

How many shares would an investor end up with if he or she originally had 150 shares?

Number of shares ___________________

What is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant?

Total Investment

Before stock dividend

After stock dividend

23. Health Systems Inc. is considering a 15% stock dividend. The capital accounts are as follows:

Common stock (3,500,000 shares at $10 par) $ 35,000,000

Capital in excess of par* 10,000,000

Retained earnings 45,000,000

Net Worth 90,000,000

*The increase in capital in excess of par as result of a stock dividend is equal to the shares created times.

The company’s stock is selling for $28 per share. The company had total earnings of $7,000,000 with 3,500,000 shares outstanding and earnings per share were XXXXXXXXXXThe firm has a P/E ratio of 14.

a. What adjustments would have to be made to the capital accounts for a 15% stock dividends? Show the new capital accounts.

b. What adjustments would be made to EPS and the stock price?

c. How many shares would an investor have if he or she originally had 100?

d. What is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant?

e. Assume Mr. Heart, the president of Health System, wishes to benefit stockholders by keeping the cash dividend at a previous level of $1.15 in spite of the fact that the stockholders now have 15% more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $28.

What is an investor’s total investment worth after the stock dividend if he/she had 100 shares before the stock dividend?

f. Under the scenario described in part e. is the investor better off? Yes________ No __________

g. As a final question, what is the dividend yield on this stock under the scenario described in part e?

24. Worst Buy Company has had a lot of complaints from customers of late, and its stock price is now only $4 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Dean Smith owns 90 shares.

How many shares will he own after the reverse stock split? Number of shares _____________

What is the anticipated price of the stock after the reverse stock split?

Anticipated stock price ________________

Because investors often have a negative reaction to a revere stock split, assume the stock only goes up to 90% of the value computed in part b. What will the stock’s price be?

Stock price ___________________

How has the total value of Dean Smith’s holdings changed from before the reverse stock split (based on the stock value computed in part c)? To get the total value before an after the split, multiply the shares held times the stock price. Dean Smith’s holdings ___________________

25. The Carlton Corporation has $6 million in earnings after taxes and 2 million shares outstanding. The stock trades at a P/E of 15. The firm has $2 million in excess cash.

a. Compute the current price of the stock.

b. If the $2 million is used to pay dividends, how much will dividends per share be?

c. If the $2 million is used to repurchase shares in the market at a price of $47 per share, how many shares will be acquired?

d. What will the new earnings per share be?

e. If the P/E ratio remains constant, what will the price of the securities be?

f. By how much, in terms of dollars, did the repurchase increase the stock price?

g. Has the stockholders’ total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividend? Yes ____________ No ______________

26. The Hastings Sugar Corporation has the following pattern of net income each year, and associated capital expenditure projects. The firm can earn a higher return on the projects than the projects than the stockholders could earn if the funds were paid out in the form of dividends.

Year Net Income Profitable Capital

Expenditure

1 $13 million $ 7 million

2 21 million 12 million

3 11 million 7 million

4 14 million 8 million

5 17 million 9 million

The Hasting Corporation has 2 million shares outstanding.

a. If the marginal principal of retained earnings is applied, how much in total cash dividends will be paid over the five years?

Total cash dividends ______________millions

b. If the firm simply uses a payout ratio of 40 percent of net income, how much in total cash dividends will be paid?

Total cash dividends ______________millions

c. If the firm pays a 20% stock dividend in years 2 through 5, and also pays a cash dividends of $2.40 per share for each of the five years, how much in total dividends will be paid?

Total cash dividends ____________

d. Assume the payout ratio in each year is to be 30% of net income and the firm will pay a 20% stock dividend in years 2 through 5. How much will dividends per share for each year be?

Year

Dividends per Share

1

2

3

4

5

Answered Same Day Jul 11, 2020

Solution

Aarti J answered on Jul 13 2020
143 Votes
Sheet1
    1    Unfreindly outsider acquired:
        =    Number of shares * percentage of acquisition
        =    14500000 * 20%
        =    2900000
        New purchase price =    Share price * (1-existing purchase)
        =    76 * (1-.25)
        =    57
    2    Shares reacquired =    (Nmber of directors desired) * (Total number of shares outstanding / Total number of directors to be elected + 1
        =    ((6*74000) / (14+1)) + 1
        =    29601    shares
    3    Total votes =    Ost shares *directors
        =    39000 * 13
        =    507000
        Votes controlled by betsy =    Shares owned by betsy * directors
        =    960 * 13
        =    12480
        Percentage of hold =    12480 / 507000
        =    2.46%
    4    Number of directors elected =    ((shares owned-1)*(Total number of directors to be elected)+1) / Total number of shares ost
        =    ((31001-1)*(11+1)) /((31001+51001+29998)
        =    3.32
        =    3 directors
        ramsey =    ((51001-1)*(11+1)) /((31001+51001+29998)
        =    5    directors
        Mr clark    ((29998-1)*(11+1)) /((31001+51001+29998)
            3    directors
        If 9 directors were elected.
        =    (39001+(29998/2)-1)*(9+1) / (310001+51001+29998)
        =    5    directors
    5    Founder family votes =    Shares owned * numbe
        =    2525*10
        =    25250
        Class B votes =    Total shares - founders family shares
        =    1800000 - 25250
        =    1774750
        Percentage =    1.423%
    6    Value of right =    3
        Portfolio value =    426
        Diluted value =    71
        Total portfolio value =    426
        Total portfolio value =
        Stock    426
    7    Earning per share =    3.21
        P/E ratio =    16.8
        After right offering:
        EPS =    2.92
        Ex right price =    1.12
        =    52.88
        P/E ratio =    18.10
    8a    Dividends in...
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