Chapter 13 Dividend Policy and Internal Financing

16) For accounting purposes a stock split has been defined as a stock dividend exceeding

A) 25 percent.

B) 35 percent.

C) 50 percent.

D) 66 2/3 percent.

17) All of the following are rationales given for a stock dividend or split EXCEPT

A) the price will not fall proportionately to the share increase.

B) an optimum price range does not exist.

C) there is positive informational content associated with the announcement.

D) conservation of corporate cash.

18) Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

A) conserve cash

B) reduce the market price to a more popular trading range

C) obtain additional capital

D) increase investor's net worth

19) What is the economic difference between a stock dividend and a stock split?

A) Stock splits create greater economic benefits to shareholders than stock dividends.

B) Stock splits increase EPS more than stock dividends.

C) There is no economic difference between a stock dividend and a stock split.

D) Stock dividends create greater economic benefits to shareholders than stock splits.

20) Assume that Plavor Brands, Inc. has 10,000,000 common shares outstanding that have a par value of $2 per share. The stock is currently trading for $30 per share. The firm reported a net profit after-tax of $25,000,000. All else equal, what will happen to earnings per share if the company issues a 10% stock dividend?

A) Earnings per share will remain the same since a stock dividend does not create an expense.

B) Earnings per share will increase because the dividend increases the value of the company.

C) Earnings per share will decrease because the number of shares outstanding will go up.

D) The impact cannot be determined without additional information on the new price per share.

21) Cyberco Corporation has 5 million shares of stock outstanding. Cyberco's after-tax profits are $15 million and the corporation's stock is selling at a price-earnings multiple of 10, for a stock price of $30 per share. Cyberco management issues a 25% stock dividend.

a. Calculate Cyberco's earnings per share before and after the stock dividend.

b. Suppose an investor owns 100 shares of Cyberco before the stock dividend. Use the price earnings multiple to estimate the value of the investor's holdings both before and after the dividend.

c. Comment on the results of the stock dividend for current shareholders.

22) Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 earnings available for common stockholders. The board of directors has just voted a 5:2 stock split.

a. If you had 100 shares of stock before the split, how many shares will you have after the split?

b. What was the total value of your investment in Dryden stock before the split?

c. What should be the total value of your investment in Dryden stock after the split?

d. In view of your answers to (b) and (c) above, why would a firm's management want to have a stock split?

23) Ted Tech Inc. is offering a 10% stock dividend. The firm currently has 200,000 shares outstanding and after-tax profits of $800,000. The current price of the stock is $48.

a. Calculate the new earnings per share.

b. What is the original price/earnings multiple?

c. Providing that the price/earnings multiple stays the same, what will the new stock price be after the stock dividend?

24) Outpost has 2 million shares of common stock outstanding; net income is $300,000; the P/E ratio is 9; and management is considering an 18% stock dividend. What will be the expected effect on the price of the common stock? If an investor owns 300 shares in the company, how does this change his total value? Explain.

25) Kelly owns 10,000 shares in McCormick Spices, which currently has 500,000 shares outstanding. The stock sells for $86 on the open market. McCormick's management has decided on a two-for-one split.

a. Will Kelly's financial position change after the split, assuming that the stock's price will fall proportionately?

Trevor Corporation - Stock Split

Market price $ 86.00

Split multiple 2

Shares outstanding 500,000

b. Assuming only a 35% decrease in the stock price, what will be Kelly's value after the split?