Question

Q 1. Suppose that you own 2,600 shares of Nocash Corp. and the company is about

to pay a 25% stock dividend. The stock currently sells at $120 per share.

a. What will be the number of shares that you hold after the stock dividend is paid? (Do not round intermediate calculations.)

b. What will be the total value of your equity position after the stock dividend is paid? (Do not round intermediate calculations.)

c. What will be the number of shares that you hold if the firm splits five-for-four instead of paying the stock dividend?

Q 2. Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.5 million shares that are outstanding. Shareholders require a rate of return of 10% from Consolidated stock.

a. What is the price of Consolidated stock? (Do not round intermediate calculations.)

b. What is the total market value of its equity? (Enter your answer in millions.)

Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year.

c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.)

d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.)

e. What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.)

f. Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive?

Q 3. The expected pretax return on three stocks is divided between dividends and capital gains in the follow way:

Expected Expected

Stock Dividend Capital Gain

A $0 $10

B 5 5

C 10 0

a. If each stock is priced at $115, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 45% (the effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Stock Pension Investor Individual

corporation

A % % %

B % % %

C % % %

b. Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks are priced to yield an after-tax return of 10%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock Price

A

B

C

 

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