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FIN222 Lecture Notes - Lecture 12: Dividend Imputation, Capital Market, Special Dividend

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silverhound358
1 Aug 2018
School
UOW
Department
Finance
Course
FIN222
Professor
Aelee Jun

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Document Summary

Fin222 - review lecture 11: payout policy = the way firm chooses between the alternative ways to pay cash out to shareholders. Retain: % determine by retention rate = 1 payout ratio invest new projects or increase cash reserve. Payout: % determine by payout ratio which is dps/eps. Repurchase shares or pay dividend: 3 types of dividends a. Regular cash dividends = dividends are paid twice per year in australia (interim dividend & final dividend) b. Special dividend = a one-off dividend payment a firm makes that is usually much larger than regular dividend c. liquidating dividend (= return of capital) = the final dividend that is paid to stockholders when a firm is liquidated: important dates: Investors who purchased shares during cum-dividend period will be entitled to receive the dividend. A company closes its share register to determine which shareholders are entitled to receive current dividends.

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Related Questions

Harris Corp has 4 million outstanding common shares, and paid $2.15 per share in dividends last year. The current share price is $28. For the past 6 years the company has maintained a policy of paying out 65% of earnings as cash dividends. Exhibit below contains the projected balance sheet for Harris Corp for the upcoming year end, assuming no dividends. Earnings after tax are projected at $14,153,846.15.

a). If Harris Corp maintains its steady 65% cash dividend payout policy, what will be the total cash dividend payout and the total debt-to-equity ratio following the payout. What dividend payment will a holder of 300 common shares receive? Show your calculations.

b). Suppose that Harris Corp retains all its cash in order to finance the purchase of a large piece of land that will be used for future development of a new production centre. Instead of a cash dividend, a 30% stock dividend will be paid. Assess the impact of a stock dividend as follows:

i). What will the holder of 300 common shares receive?

ii). How will the balance sheet change, given the stock dividend, and what will the total debt-to-equity ratio be if earnings are projected to be unchanged after the land purchase?

iii). What can this same shareholder expect to receive in cash dividends next year if Harris returns to its steady 65% cash dividend payout policy?

c). Suppose that Harris has no investment plans and would like to payout 65% of its earnings to shareholders in the form of a share repurchase this year, and then will return to its policy of paying cash dividends in its future years. Earnings are projected to be unchanged. Assess the impact of a share repurchase as follows:

i). Calculate the number of shares Harris can repurchase if the share price remains at $28.

ii). Calculate the number of shares that will remain outstanding.

iii). In the next year, when the cash dividends are resumed, Calculate the per-share dividend and amount of dividends to be received by the former owner of 300 shares.

d). Referring to your analysis in part a) to c) briefly explain which of the three policies would be most attractive to shareholders.

Projected Balance Sheet Harris Corp.

Assets

Current Assets

Cash

18,000,000

Accounts Receivable

2,400,000

Inventory

9,230,000

29,630,000

PPE

6,240,000

Land

6,000,000

41,870,000

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts Payable

1,870,000

Notes Payable

2,000,000

3,870,000

Long Term Debt

9,000,000

Common Shares

4,000,000

Retained Earnings

25,000,000

$41,870,000

25. If a merger is done for __________ reasons, then the combined corporation will be worth more than the two individual corporations (2+2 = 5).

  1. Expropriation
  2. Synergy
  3. Hubris
  4. Wealth Redistribution

26. A(n) __________ is when a parent company sells shares of a subsidiary to the public.

  1. Divestiture
  2. Leveraged Buyout
  3. Joint Venture
  4. Equity Carveout

27. Antitakeover measures primarily protect ______________.

  1. Acquiring firm managers
  2. Acquiring firm shareholders
  3. Target firm shareholders
  4. Target firm managers

28. If investors prefer dividends to capital gains (Bird in the Hand theory is true), then

  1. The cost of equity will decrease as the retention ratio increases
  2. The cost of equity will decrease as the payout ratio decreases
  3. The cost of equity will increase as the retention ratio decreases
  4. The cost of equity will increase as the payout ratio decreases

29. _______________ are when the firm buys back a set number of shares on a set date for a specific price.

  1. Dividend Reinvestment Plans
  2. Tender Offers
  3. Dutch auctions
  4. Clientele Repurchases

30. Any signaling effect of dividends should occur on the ______________.

  1. Declaration Date
  2. Ex-Dividend Date
  3. Record Date
  4. Payment Date

31. Which statement is TRUE?

  1. Dividend rights say that shareholders get any remaining assets after all creditors have been paid in bankruptcy
  2. According to financial theory, shareholder wealth should be unaffected by a two-for-one stock split.
  3. A stock split is a large stock dividend so that you might have twice as many shares with each share being worth half as much.
  4. The stock price should fall by the amount of the dividend on the ex-dividend date.

32. Which statement is FALSE?

  1. In a Stock Swap, the acquiring firm issues shares of stock in order to pay for the acquisition
  2. A conglomerate merger is between unrelated firms
  3. A Leveraged Buyout involves creating a new company out of part of your company and then selling shares of the new company to the public.
  4. In an asset purchase, the acquiring firm does not assume the liabilities of the target firm.

33. Suppose that prior to a merger the stock price of the target company was $50 and the stock price of the acquiring company was $40. If the acquiring firm agrees to pay 1.5 share of their stock for every share of the target firms stock, then what premium are they offering?

a) 10% b) 20% c) 25% d) 33%

34. Which statement is FALSE?

  1. The White Knight defense is when you try to sell yourself to a

Electronic Timing Case Pg 619-620 in Corporate Finance tenth edition

Electronic timing
shares outstanding $1,000,000.00 100% $1,000,000.00 100,000.00 $ 10.00
3 owners, each owns 25% of the $1million shares outstanding = 75% $750,000.00 $250,000.00
remaining shares 25%
aftertax payment of motherboard $30,000,000.00

1. Tom believes the company should use the extra cash to pay a special onetime dividend. How will this proposal affect the stock price?

How will it affect the value of the company?

2. Jessica believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Jessica’s proposal affect the company?

3. Nolan is in favor of a share repurchase. He argues that a repurchase will
increase the company’s P/E ratio, return on assets, and return on equity. Are his arguments correct?

How will a share repurchase affect the value of the company?

5.One way to value a share of stock is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is 1 minus b, where b is the “retention” or “plowback” ratio.
So, the dividend next year will be the earnings next year, E1, times 1 minus the retention ratio. The most commonly used equation to calculate the sustainable growth rate the return on equity times the retention
ratio. Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of share of stock today.
P0= E1(1-b) / Rs-ROE*b
What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain.

6. Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or an LLC?

4. Another option discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?