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# Dividends, Stock Repurchase and Policy

### Stock Repurchase vs. Dividends

What are some of the reasons for a company preferring stock repurchases to dividends?

### Preferred stock/PE Ratio/earnings per share

1. Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton University, which will cost \$17,000 per year for four years (cost assumed to come at the end of each year). Anticipating Linda's ambitions, your parents started investing \$2,000 per year five years

### Using ratio analysis, compare two major competitors in the same industry

Instructions: - The reason for requiring you to use Excel is that I need to see your calculations and Excel enables me to see them. - For assigned problems that require you to find the rate of interest or the rate of growth (the rate of interest is the same thing as the rate of growth), please use the Excel RATE function

### If the market capitalization rate for each stock is 10 percent, which stock is the most valuable?

Consider the following three stocks: A: Stock A is expected to provide a dividend of \$10 a share forever B: Stock B is expected to pay a dividend of \$5 next year. Thereafter, dividend growth is expected to be 4 percent a year forever. C: Stock C is expected to pay a dividend of \$5 next year. Thereafter, dividend gr

### Dividend Policy

Here are several assertions about typical corporate dividend policies. Which of them are true? Write out a corrected version of any false statements. a. Most companies set a target dividend payout ratio. b. They set each year's dividend equal to the target payout ratio times that year's earnings. c. Managers and investor

### Retained Earnings Increase

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 shar

### Repurchase of Stock

Company c is planning to pay dividends of \$550,000. There are 275,000 shares outstanding, with an earnings per share of \$6. The stock should sell for \$45 after the tax ex-dividend date. if instead of paying a dividend, management decides to repurchase the stock: 1. What should be the repurchase price? 2. How many shares s

### Repurchase of Stock and the Effect on Stock Price

Microsoft has \$35 billion in cash/money market securities earning 4% per year. Suppose the company announces that it will use \$25 billion of that cash to repurchase stock. What effect will this have on the stock price? Assume the stock is selling for \$52 per share. There are 4 billion shares outstanding and the expected return o

Problem #1 Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton University, which will cost \$17,000 per year for four years (cost assumed to come at the end of each year). Anticipating Linda's ambitions, your parents started investing \$2,000 per year fi

### Finance Problems

The ABC Company currently has \$200,000 market value and book value of perpetual debt outstanding carrying a coupon of rate of 6 percent. Its earnings before interest and taxes (EBIT) are \$100,000 and it is zero growth company. ABC's current cost of equity is 10 percent and its tax rate is 40 percent. The firm has 10,000 shares o

### Online primer practice table

Assume the entity is using US GAAP, accrual-basis accounting. For each of the following independent situations, determine the effect of that transaction on: net income; cash; total assets; total liabilities. Complete the primer exercise by filling in the chart, showing in each area either I (increase), D (decrease), or N

### Capital structure and stock price

Please help with the following problem. Dabney Electronics currently has no debt. Its operating income is \$20 million and its tax rate is 40 percent. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is \$40 per share, and it has 2.5 million shares of stock outstanding. If i

### Auditing Questions (11-15)

11. When auditing inventories, an auditor would least likely verify that a. All inventory owned by the client is on hand at the time of the count. b. The client has used proper inventory pricing. c. The financial statement presentation of inventories is appropriate. d. Damaged goods and obsolete items have been properly ac

### Dividend Policy

Dividend Policy. For each of the following four groups of companies, state whether it would be expected to distribute a relatively high or low proportion of current earnings and whether it would be expected to have a relatively high or low price earnings ratio. a. High Risk Companies b. Companies that have recently experi

### Dividend Policy

Dividend Policy. "Risky companies tend to leave lower target payout ratios and more gradual adjustment rates" What is it meant by this statement, explain why.

### Stock Repurchase Price

Beta industries has net income of \$2,000,000 and it has 1,000,000 shares of common stock outstanding. The company's stock currently trades of \$32 a share. Beta is considering a plan where it will use available cash to repurchase 20 percent of its shares in the open market. The repurchase is expected to have no effect on eithe

### Constant-Growth Model.

Here are data on two stocks, both of which have discount rates of 15 percent. Stock A Stock B Return on Equity 15% 10% Earnings per Share \$2.00 \$1.50 Dividends per Share \$1.00 \$1.00 a. What are the dividend payout ratios for each firm? b. What are the expected dividend growth rates for eac

### Surgical Supplies Corp.

Surgical Supplies Corp. paid a dividend of \$1.12 over the last 12 months. The dividend is expected to grow at a rate of 25% over the next 3 years (supernormal growth). It will then grow at a normal, constant rate of 7% for the foreseeable future. The required rate of return is 12% (this will also serve as the discount rate).

### EPS: Blue Skies Company

Blue Skies Company has earnings available for common stockholders of \$4 million and has 1,000,000 shares of common stock outstanding at \$120 per share. The firm is currently contemplating the payment of \$4 per share in cash dividends. a. Calculate the firm's current earnings per share (EPS) and price/earnings (P/E) ratio b

### Investing

Compare a regular cash dividend with a periodic share repurchase. Which has greater appeal? Explain. Explain a stock dividend and explain if you would prefer it to a cash dividend What are the stock splits and how desirable are they?

### Managerial Finance

XYZ Corporation has \$4 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E ratio of 20. The firm has \$3 million in excess cash. a. Compute the current price of the stock. b. If the \$3 million is used to pay dividends, how much will dividends per share be? c. If the \$3 million is u

### Stock Repurchase

Beta Industries has a net income of \$2,000,000 and it has \$1,000,000 shares of common stock outstanding. The company's stock currently trades @\$32 a share. Beta is considering a plan in which it will use available cash to repurchase 20% of its shares in the open market. The repurchase is expected to have no effect on either net

### Stock Values

Integrated Potato Chips paid a \$1 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 4 percent per year. a. What is the expected dividend in each of the next 3 years? b. If the discount rate for the stock is 12 percent, at what price will the stock sell? c. What is the expected stock price 3

### Description of Stock Transactions

On January 1, Armada Corporation had 95,000 shares of no-par common stock issued and outstanding. The stock has a stated value of \$5 per share. During the year, the following occurred Apr 1 Issued 15,000 additional shares of common stock for \$17 per share. June 15 Declared a cash dividend of \$ 1 per share to stockholders of

### Explain the theories of high dividend distributions vs low and price-earnings ratios

The homework problem reads as this. State whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to have a relatively high or low price-earnings ratio. a. High-risk companies. b. Companies that have recently experienced a temporary decline in prof

### Green Manufacturing Financial Analysis

Green Manufacturing, Inc., plans to announce that it will issue \$2 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will have a 6-percent annual coupon rate. Green is currently an all-equity firm worth \$10 million with 500,000 shares of common stock outstanding. After the sale of the bonds, G

### General Electric Debt/Equity Instruments

What is General Electrics various debt/equity instruments that they use?

### Stock Repurchase - Accounting Error Corrections

AC Co. began Operations in 2001 and has never been audited. You have been hired to audit their 12/31/04 financial statements. The books are kept on a cash basis. In the past the bookkeeper has prepared the tax return on the same basis as the books, thus no temporary differences were recognized. You are, therefore, assuming th

### Financial Analysis for Target

Your parents have been left a substantial amount of money and want to invest in a company. Your father trusts you to make a recommendation, but also wants to see the reasoning behind your choice. You have an idea of which company to choose and you decide to prepare three sets of documents for your parents to consider: busines

### What price is Payout selling today. What effect will the repurchase have on an investor who currently holds 100 shares and sell 1 of those shared back to the company in the repurchase? Payout decides to issue a 1 percent stock dividend instead of either issuing the cash dividend or repurchasing 1 percent of the outstanding stock. How would this action affect a shareholder who owns 100 shares of stock?

8.Cash Dividend-The stock of Payout Corp. Will go ex-dividend tomorrow. The dividend will be \$0.50 per share, and there are 20,000 shares of staock outstanding. The market-value balance sheet for Payout is shown below a.What price is Payout selling today. b. What price will it sell for tomorrow? Ignore taxes Assets L