Stock Market and Dividend Essay

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Pages: 15

Chapter 19: Dividends and Other Payouts

19.1.The aftertax dividend is the pretax dividend times one minus the tax rate, so:

Aftertax dividend = \$5.60(1 – 0.15) = \$4.76

The stock price should drop by the aftertax dividend amount, or:

Ex-dividend price = \$75 – 4.76 = \$70.24

19.2 a. The shares outstanding increases by 10 percent, so:

New shares outstanding = 20,000(1.10) = 22,000

New shares issued = 2,000

Since the par value of the new shares is \$1, the capital surplus per share is \$47. The total capital surplus is therefore:

Capital surplus on new shares = 2,000(\$47) = \$94,000

Common stock (\$1 par value)
\$ 22,000

Capital surplus 94,000

Retained earnings 849,300

\$965,300 b. The shares outstanding increases by 25 percent, so:

New shares outstanding = 20,000(1.25) = 25,000 New shares issued = 5,000

Since the par value of the new shares is \$1, the capital surplus per share is \$47. The total capital surplus is therefore:

Capital surplus on new shares = 5,000(\$47) = \$235,000

Common stock (\$1 par value)
\$ 25,000

Capital surplus 235,000

Retained earnings 705,300

\$965,300

19.3 a. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so:

New shares outstanding = 20,000(4/1) = 80,000

The equity accounts are unchanged except that the par value of the stock is changed by the ratio of new shares to old shares, so the new par value is:

New par value = \$1(1/4) = \$0.25 per share.

b. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so:

New shares outstanding = 20,000(1/5) = 4,000.

The equity accounts are unchanged except that the par value of the stock is changed by the ratio of new shares to old shares, so the new par value is:

New par value = \$1(5/1) = \$5.00 per share.

19.4 To find the new stock price, we multiply the current stock price by the ratio of old shares to new shares, so:

a. \$78(3/5) = \$46.80

b. \$78(1/1.15) = \$67.83

c. \$78(1/1.425) = \$54.74

d. \$78(7/4) = \$136.50.

To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so: a: 260,000(5/3) = 433,333

b: 260,000(1.15) = 299,000

c: 260,000(1.425) = 370,500

d: 260,000(4/7) = 148,571

19.5 The stock price is the total market value of equity divided by the shares outstanding, so:

P0 = \$380,000 equity/8,000 shares = \$47.50 per share

Ignoring tax effects, the stock price will drop by the amount of the dividend, so:

PX = \$47.50 – 1.60 = \$45.90

The total dividends paid will be:

\$1.60 per share(8,000 shares) = \$12,800

The equity and cash accounts will both decline by \$12,800.

19.6 Repurchasing the shares will reduce shareholders’ equity by \$12,800. The shares repurchased will be the total purchase amount divided by the stock price, so:

Shares bought = \$12,800/\$47.50 = 269

And the new shares outstanding will be:

New shares outstanding = 8,000 – 269 = 7,731

After repurchase, the new stock price is:

Share price = \$367,200/7,731 shares = \$47.50

The repurchase is effectively the same as the cash dividend because you either hold a share worth \$47.50 or a share worth \$45.90 and \$1.60 in cash. Therefore, you participate in the repurchase according to the dividend payout percentage; you are unaffected.

19.7 The stock price is the total market value of equity divided by the shares outstanding, so:

P0 = \$455,000 equity/20,000 shares = \$22.75 per share

The shares outstanding will increase by 25 percent, so:

New shares outstanding = 20,000(1.25) = 25,000

The new stock price is the market value of equity divided by the new shares outstanding, so:

PX = \$455,000/25,000 shares = \$18.20

19.8 With a stock dividend, the shares outstanding will increase by one plus the dividend amount, so:

New shares outstanding = 380,000(1.12) =