Stock Split, Residual Distribution Policy, External Equity Financing

1. Stock Split

Suppose you own 4,000 common shares of Laurence Incorporated. The EPS is $8.00, the DPS is
$4.75, and the stock sells for $65 per share. Laurence announces a 2-for-1 split. Immediately
after the split, how many shares will you have?
What will the adjusted EPS and DPS be? Round your answers to the nearest cent.
EPS
DPS

$
$

What would you expect the stock price to be? Round your answer to the nearest cent.
$

2.  Residual Distribution Policy

Harris Company must set its investment and dividend policies for the coming year. It has three
independent projects from which to choose, each of which requires a $4 million investment.
These projects have different levels of risk, and therefore different costs of capital. Their
projected IRRs and costs of capital are as follows:
Project A: Cost of capital = 16%; IRR = 20%
Project B: Cost of capital = 10%; IRR = 15%
Project C: Cost of capital = 9%; IRR = 8%
Harris intends to maintain its 45% debt and 55% common equity capital structure, and its net
income is expected to be $11,296,500. If Harris maintains its residual dividend policy (with all
distributions in the form of dividends), what will its payout ratio be? Round your answer to two
decimal places.
%

3. External Equity Financing
Gardial GreenLights, a manufacturer of energy efficient lighting solutions, has had such success
with its new products that it is planning to substantially expand its manufacturing capacity with a
$20 million investment in new machinery. Gardial plans to maintain its current 45% debt-tototal-assets ratio for its capital structure and to maintain its dividend policy in which at the end of
each year it distributes 40% of the year's net income. This year's net income was $8 million. How
much external equity must Gardial seek now to expand as planned? Enter your answer in
millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round
your answer to two decimal places.
$ million

4. Stock Split
Fauver Enterprises declared a 3-for-1 stock split last year, and this year its dividend is $1.70
per share. This total dividend payout represents a 10% increase over last year's pre-split total
dividend payout. What was last year's dividend per share? Round your answer to the nearest
cent.
$