a.
To explain: whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to
Introduction:
Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.
b.
To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.
c.
To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.
d.
To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.
e.
To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.
f.
To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.
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Chapter 15 Solutions
Fundamentals of Financial Management (MindTap Course List)
- You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $4.00 Payout ratio 0.40 Return on equity 0.25 Cost of equity capital 0.20 The company plans to increase the payout ratio to 50% after year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. Note: Use two decimal places in your calculationsarrow_forwardWhen a company goes public, it declares what its dividend will be so investors know what their annual income will be. Question 16 options: True Falsearrow_forwardYou are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $6.00 Payout ratio 0.40 Return on equity 0.30 Cost of equity capital 0.20 The company plans to increase the payout ratio to 60% from year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. Notes: You need to show detailed calculations in order to receive full marks for this question iii)If there are positive or negative growth opportunities, explain the reason for such opportunities.arrow_forward
- The DRK Corporation recently developed a dividend investment plan, or DRIP. The plan allows investors to reinvest cash dividends automatically in DRK in exchange for new shares of stock. Over time, investors in DRK will be able to build their holdings by reinvesting dividends to purchase additional shares of the company. Over 1,000 companies offer dividend reinvestment plans. Most companies with DRIP charge no brokerage or service fees. In fact, the shares of DRK will be purchased at a 10% discount from the market price. A consultant for DRK estimates that 75% of DRK’s shareholders will take part in this plan, which is somewhat higher than the average. a). Evaluate DRK’s dividend investment plan. Will it increase shareholders wealth? Discuss the advantages and disadvantages involved here. b). From a shareholder point of view, what are the advantages and disadvantages of dividend reinvestment plans? What type of investor is likely to use these, and why?arrow_forwardWhat is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 100% stock dividend or a 2-for-1 split? Assume that either action is feasible.arrow_forwardWhich of the following is not true? a. Common stockholders have a limited liability b. Unpaid dividend on common stock is accumulated over time c. If the investors require a 10% return and the firm offers a constant dividend of $1 per year, the current stock price should be $10 d.Common stock holders have a residual claim on the firm's income and assetsarrow_forward
- Your corporation is evaluating declaring a cash dividend or declaring a share repurchase. In either case your corporation only has $10,000 to spend. Your corporation has 700 shares of stock outstanding that is currently selling for $55.00 per share. Please show your calculations in the space provided.What would be the amount of cash dividend per share if your corporation declares a cash dividend?arrow_forwardBuilt Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case, $7,500 would be spent. Current earnings are $1.24 per share, and the stock currently sells for $32 per share. There are 5,000 shares outstanding. Ignore taxes and other imperfections. You own one share of stock in this company. If the company issues the dividend, your total investment will be worth ____ as compared to ____ if the company opts for a share repurchase.arrow_forwardAssume that you are a shareholder in On-the-Move Corporation. The company has just changed its debt-equity ratio from 0.29 to 0.38. If you prefer the old capital structure, you should: Multiple Choice O sell some shares and loan out the sale proceeds. do nothing. borrow funds and purchase more shares. sell some shares and hold the sale proceeds in cash. sell all of their shares and loan out the entire sale proceeds.arrow_forward
- You are an investment adviser. One of your clients approaches you for your advice on investing inequity shares of Theta Company. You have collected the following data:Earnings per share last year $6.00Payout ratio 0.40Return on equity 0.30Cost of equity capital 0.20The company plans to increase the payout ratio to 60% from year 5.Required:i) Estimate the price of an equity share of this company using an appropriate dividenddiscount model and advise your client whether they should buy a share of the company.ii) Your client is keen to know whether there are any growth opportunities from theirinvestment. Explain to your client the meaning of this concept using appropriatecalculations.iii) If there are positive or negative growth opportunities, explain the reason for suchopportunities.arrow_forwardErna Corporation is evaluating an extra dividend versus a share repurchase. In either case, $19,000 would be spent. Current earnings are $1.60 per share and the stock currently sells for $50 per share. There are 2,500 shares outstanding. Ignore taxes and other imperfections. a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. What will be the effect on the company’s EPS and PE ratio under the two different scenarios? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Give typing answer with explanation and conclusionarrow_forward
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