# Dividends, earnings and warrants

4. Springsteen Music Company earned $820 million last year and paid out 20 percent of earnings in dividends.

a. By how much did the company's retained earnings increase?

b. With 100 million shares outstanding and a stock price of $50, what was the dividend yield? (Hint: First compute dividends per share.)

10. The shares of Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 15. 40% of earnings is paid out in dividends. What is the firm's dividend yield?

12. Laser Electronics Co. has $30 million in 8% convertible bonds outstanding. The conversion ratio is 50; the stock price is $17; and the bonds matures in 15 years. The bonds are currently selling at a conversion premium of $60 over their conversion value. If the price of the common stock rises to $23 on this date next year, what would your rate of return be if you bought a convertible bond today and sold it in one year? Assume on this date next year, the conversion premium has shrunk from $60 to $10.

13. Assume you can buy a warrant for $5 that gives you the option to buy one share of common stock at $14 per share. The stock is currently selling at $16 per share.

a. What is the intrinsic value of the warrant?

b. What is the speculative premium on the warrant?

c. If the stock rises to $24 per share and the warrant sells at its theoretical value without a premium, what will be the percentage increase in the stock price and the warrant price if you bought the stock and the warrant at the prices stated above? Explain this relationship.

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#### Solution Preview

4. Springsteen Music Company earned $820 million last year and paid out 20 percent of earnings in dividends.

a. By how much did the company's retained earnings increase?

The retained earnings will increase by net income - dividend. The increase in retained earnings is 820-820X20%=$656 million.

b. With 100 million shares outstanding and a stock price of $50, what was the dividend yield? (Hint: First compute dividends per share.)

The dividend amount is 820X20%=$164 million

Number of shares outstanding is 100 million.

Dividend per share is 164/100=$1.64

Stock price is $50

Dividend yield is 1.64/50=3.28%

10. The shares of Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 15. 40% of earnings is ...

#### Solution Summary

The solution has various problems relating to dividends, retained earnings, warrants and derivatives