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FINA601 Lecture Notes - Lecture 8: Dividend, Liquidating Distribution, Retained Earnings

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plumporpoise584
17 Nov 2018
School
AUT
Department
FINA
Course
FINA601
Professor
Ivan

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Document Summary

Week 8 lecture 8 chapter 19: dividends and other pay-outs. Different types of pay-outs (19. 1: the term dividend usually refers to a cash distribution of earnings. Other companies use stock repurchase: an alternative form of cash pay-out is a stock repurchase, just as a firm may use cash to pay dividends, it may use cash to buy back shares of its stock. The shares are held by the corporation and accounted for as treasury stock. Cash dividend: payment of cash by the firm to its shareholders. Ex-dividend date: date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock immediately before this date is entitled to a dividend. Record date: date on which company determines existing shareholders. To eliminate this problem, all brokerage firms entitle stockholders to receive the dividend if they purchased the stock three business days before the date of record. The second day before the date of record, which is.

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Related Questions

The Howe​ Company's stockholders' equity account is as​ follows:

. The earnings available for common stockholders from this​ period's operations are​ $100,000, which have been included as part of the ​$1.9 million retained earnings.

a. What is the maximum dividend per share that the firm can​ pay? ​ (Assume that legal capital includes all​ paid-in capital.)

b.  If the firm has ​$150,000 in​ cash, what is the largest​ per-share dividend it can pay without​ borrowing?

c. Indicate the accounts and​ changes, if​ any, that will result if the firm pays the dividends indicated in parts a and b.

d. Indicate the effects of an ​$80,000 cash dividend on​ stockholders' equity.

Common stock (500,000 shares at $4 par)

 2,000,000

​Paid-in capital in excess of par

2,000,000

Retained earnings

1,900,000

Total​ stockholders' equity

$5,900,000

Tesford plc has estimated net cash flows from operations (after interest and taxation) for the next five years as follows:

Year Cashflow
1 £ 3,000,000
2 £ 12,000,000
3 £ 5,000,000
4 £ 6,000,000
5

£ 5,000,000

The cash flows have been calculated before the deduction of additional investment in fixed capital and working capital.
This amounts to £2m in each of the first two years and £3m for each year thereafter. The firm currently has a cash balance of £500,000 which
it intends to maintain to cope with unexpected events. There are 24 million shares in issue. The directors are committed to shareholder wealth maximisation.

A. Calculate the annual cash flow available for dividend payments and the dividend per share is the residual dividend policy was strictly adhered to.

B. If the directors chose to have a smooth dividend policy based on the maintainable regular dividend what would you suggest the dividends in each year should be?
Include in your consideration the possibility of a special dividend or share repurchase.

C. Explain why companies tent to follow the policy in B rather than A.

Conroy Consulting Corporation (CCC) has been growing at a rate of 14% per year in recent years. This same non-constant growth rate is expected to last for another 2 years (g0,1 = g1,2 = 14%). If D0= $1.70, rs= 9% and gL = 6%, then what is CCC's stock worth today? Round your answer to the nearest cent. Do not round your intermediate computations. $ What is its expected dividend yield at this time? Round the answer to two decimal places. Do not round your intermediate computations. % What is its capital gains yields at this time? Round the answer to two decimal places. Do not round your intermediate computations. % Now assume that CCC's period of supernormal growth is to last another 5 years rather than 2 years (g0,1 = g1,2 = g2,3 = g3,4 = g4,5 = 14%). How would this affect its price, dividend yield, and capital gains yield? I.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. II.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. III.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the supernormal growth period. IV.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. V.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. What will CCC's dividend yield and capital gains yield be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth, and the calculations are very easy.) Round the answers to two decimal places. Do not round your intermediate computations. Dividend yield % Capital gains yield % Of what interest to investors is the relationship over time between dividend yield and capital gains yield? I.It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate. II.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year. III.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold. IV.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized. V.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold.