1、How does the stockholder, in general, feel about the relevance of dividends?The stockholder would appear to consider dividends as relevant. Dividends do resolve uncertainty in the minds of investors and provide information content. Some stockholders may say that the dividends are relevant, but in a
2、different sense. Perhaps they prefer to receive little or no dividends because of the immediate income tax.18-4.Explain the relationship between a companys growth possibilities and its dividend policy.The greater a companys growth possibilities, the more funds that can be justified for profitable in
3、ternal reinvestment. This is very well illustrated in Table 18-1 in which we show four-year growth rates for selected U.S. corporations and their associated dividend payout percentages. This is also discussed in the life cycle of the firm.18-5.Since initial contributed capital theoretically belongs
4、to the stockholders, why are there legal restrictions on paying out the funds to the stockholders?Creditors have extended credit on the assumption that a given capital base would remain intact throughout the life of a loan. While they may not object to the payment of dividends from past and current
5、earnings, they must have the protection of keeping contributed capital in place.18-6.Discuss how desire for control may influence a firms willingness to pay dividends.Managements desire for control could imply that a closely held firm should avoid dividends to minimize the need for outside financing
6、. For a larger firm, management may have to pay dividends in order to maintain their current position through keeping stockholders happy.18-7.If you buy stock on the ex-dividend date, will you receive the upcoming quarterly dividend?No, the old stockholder receives the upcoming quarterly dividend. O
7、f course, ifyou continue to hold the stock, you will receive the next dividend.18-8.How is a stock split （versus a stock dividend） treated on the financialstatements of a corporation?For a stock split, there is no transfer of funds, but merely a reduction inpar value and a proportionate increase in
8、the number of shares outstanding. Impact of a Stock Split Before AfterCommon stock （1,000,000 shares at $10 par） （2,000,000 shares at $5 par）18-9.Why might a stock dividend or a stock split be of limited value to an investor?The asset base remains the same and the stockholders proportionate interest
9、 is unchanged （everyone got the same new share）. Earnings per share will go down by the exact proportion that the number of shares increases. If the P/E ratio remains constant, the total value of each shareholders portfolio will not increase.The only circumstances in which a stock dividend may be of
10、 some usefulness and perhaps increase value is when dividends per share remain constant and total dividends go up, or where substantial information is provided about the growth of the company. A stock split may have some functionality in placing the company into a lower “stock price” trading range.1
11、8-10.Does it make sense for a corporation to repurchase its own stock? Explain.A corporation can make a rational case for purchasing its own stock as an alternate to a cash dividend policy. Earnings per share will go up as the shares decline, and if the price-earnings ratio remains the same, the sto
12、ckholder will receive the same dollar benefit as if a cash dividend was paid. Because the benefits are in the format of capital gains, the tax may be deferred until the stock is sold.A corporation also may justify the repurchase of its own stock because it is at a very low price, or to maintain cons
13、tant demand for the shares. Reacquired shares may be used for employee options or as a part of a tender offer in a merger or acquisition. Firms may also reacquire part of their stock as protection against a hostile takeover.18-11.What advantages to the corporation and the stockholder do dividend rei
14、nvestment plans offer?Dividend reinvestment plans allow corporations to raise funds continually from present stockholders. This reduces the need for some external funds. These plans allow stockholders to reinvest dividends at low costs and to buy fractional shares, neither of which can be easily acc
15、omplished in the market by an individual. The strategy of dividend reinvestment plans allows for the compounding of dividends and the accumulation of common stock over time.Problems1. Payout ratio （LO18-1） Moon and Sons Inc. earned $120 million last year and retained $72 million. What is the payout
16、ratio?18-1. Solution:Moon and Sons Inc.Dividends = Earnings Retained funds = $120 mil. $72 mil. = $48 mil.Payout ratio = Dividends/Earnings = $48 mil./$120 mil. = 40.0%2. Payout ratio （LO18-1） Ralston Gourmet Foods Inc. earned $360 million last year and retained $252 million. What is the payout rati
17、o?18-2. Solution:Ralston Gourmet Foods Inc. = $360 mil. $252 mil. = $108 mil. = $180 mil./$360 mil. = 30%3. Payout ratio （LO18-1） Swank Clothiers earned $640 million last year and had a 30 percent payout ratio. How much did the firm add to its retained earnings?18-3. Solution:Swank ClothiersAddition
18、 to retained earnings = Earnings DividendsDividends = 30% $640,000,000 = $192,000,000Addition to retained earnings = $640,000,000 $192,000,000 = $448,000,0004. Dividends, retained earnings, and yield （LO18-1） Polycom Systems earned $553 million last year and paid out 25 percent of earnings in divide
19、nds.a. By how much did the companys retained earnings increase?b. With 100 million shares outstanding and a stock price of $101, what was the dividend yield? （Hint: First compute dividends per share.）18-4. Solution:Polycom Systemsa. Addition to retained earnings= Earnings Dividends Dividends = 25% $
20、553,000,000 Dividends = $138,250,000 Earnings Dividends = $553,000,000 $138,250,000 Addition to retained earnings = $414,750,000b. Dividends/Shares = $138,250,000/100,000,000 = $1.38 Dividend yield = Dividend per share/Stock price = $1.38/$101 = 1.37 percent5. Growth and dividend policy （LO18-2） The
21、 following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons. Turtle Co. Hare Corp.Growth rate in sales and earnings 22% 4%Cash as a percentage of total assets 5 2018-5. Solution:Turtle is growing very fast and needs its cash for
22、 reinvestment in assets. For this reason, Turtle should have a low payout ratio.Hare is not growing very fast so it doesnt need cash for growth unless it desires to change its policies. Assuming it doesnt, hare should have a high dividend payout.6. Limits on dividends （LO18-3） Planetary Travel Co. h
23、as $240,000,000 in stockholders equity. Eighty million dollars is listed as common stock and the balance is in retained earnings. The firm has $500,000,000 in total assets and 2 percent of this value is in cash. Earnings for the year are $40,000,000 and are included in retained earnings.a. What is t
24、he legal limit on current dividends?b. What is the practical limit based on liquidity?c. If the company pays out the amount in part b, what is the dividend payout ratio? （Compute this based on total dollars rather than on a per share basis because the number of shares is not given.）18-6. Solution:Pl
25、anetary Travel Co.a. The legal limit is equal to retained earnings Retained earnings = Stockholders equity Common stock = $240,000,000 80,000,000 = $160,000,000b. The practical limit based on liquidity is equal to the cash balance. Cash = Cash percentage Total assets = 2% $500,000,000 = $10,000,000c
26、. Payout ratio = Dividends/Earnings = $10,000,000/40,000,000 = 25%7. Life cycle growth and dividends （LO18-2） A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividen
27、ds during the development stage （I）. During the growth stage （II）, she anticipates 12 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage （III）, the payout ratio will go up to 35 percent and eventually reach 58 percent during the maturity stage （IV）.a.
28、 Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share （if any） during each stage.Stage I $ .10Stage II 1.80Stage III 2.80Stage IV 3.70b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the investors aftertax income from the cash dividend?c. In what two stages is the firm most likely to utilize stock dividends or stock splits?18-7. Solution:Envir
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