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    Dividend Yield and Warrants

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    1. If a company earned $820 million last year and paid out 20 percent of earnings in dividends how much would the company's retained earnings increase?

    With 100 million shares outstanding and a stock price of $50, what is the dividend yield?

    2. If you buy a warrant for $5 that gives you the option to buy one share of common stock at $14 per share. The stock is 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 premium, what will be the percentage increase in the stock price and warrant price if you bought the stock and the warrant at the prices stated above?

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    Solution Preview

    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?

    The dividend amount is 820X20%=$164 million
    Number of ...

    Solution Summary

    The solution explains how to calculate the dividend yield and the intrinsic value and speculative premium on warrants.