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Dividend Policy and Stock Split Analysis

Smalltown Diners forecasts $500,000 in annual earnings. It has profitable investment opportunities of $400,000 and $500,000 exceeding its 12% cost of equity. If investments are $400,000, it should pay out $200,000-$350,000 in dividends. If investments are $500,000, it should pay the minimum of $200,000 in dividends. Kel2 has $1M shares at $4 par value, $800,000 earnings, $4M retained earnings, and stock price of $30. A 2-for-1 split doubles shares and halves par value, a 1-for-2 split halves shares and doubles par value.

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Muhammad Siddique Bokhari
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127 views1 page

Dividend Policy and Stock Split Analysis

Smalltown Diners forecasts $500,000 in annual earnings. It has profitable investment opportunities of $400,000 and $500,000 exceeding its 12% cost of equity. If investments are $400,000, it should pay out $200,000-$350,000 in dividends. If investments are $500,000, it should pay the minimum of $200,000 in dividends. Kel2 has $1M shares at $4 par value, $800,000 earnings, $4M retained earnings, and stock price of $30. A 2-for-1 split doubles shares and halves par value, a 1-for-2 split halves shares and doubles par value.

Uploaded by

Muhammad Siddique Bokhari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

DIVIDEND POLICY ASSIGNMENT

1. Smalltown Diners has a policy of treating dividends as a passive residual. It forecasts that net earnings after taxes in the coming year will be $500,000. The firm has earned the same $500,000 for each of the last five years and has paid between $200,000 and $350,000 out in dividends in each of those years. The company is financed entirely with equity and its cost of equity capital is 12 percent. a. How much of the coming year's earnings should be paid out in dividends if the company has $400,000 in projects whose expected returns exceed 12 percent? b. How much should be paid out if the company has investment projects of $500,000 whose expected return is greater than 12 percent?

2. The Kel2 Company has $1,000,000 shares of $4 par value stock outstanding (250,000 shares), $800,000 of earnings, and 4,000,000 of retained earnings. The current market price of the stock is $30 per share. What will happen to this account, to the number of shares outstanding and the par value if the stock splits (1) 2-for-1 or (2) 1-for-2?

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