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# Stock Split, Residual Distribution, and External Equity

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1. Stock Split
Suppose you own 4,000 common shares of Laurence Incorporated. The EPS is \$8.00, the DPS is \$4.75, and the stock sells for \$65 per share. Laurence announces a 2-for-1 split. Immediately after the split, how many shares will you have?

What would you expect the stock price to be? Round your answer to the nearest cent.

2. Residual Distribution Policy
Harris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a \$4 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows:

Project A: Cost of capital = 16%; IRR = 20%
Project B: Cost of capital = 10%; IRR = 15%
Project C: Cost of capital = 9%; IRR = 8%

Harris intends to maintain its 45% debt and 55% common equity capital structure, and its net income is expected to be \$11,296,500. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be? Round your answer to two decimal places.

3. External Equity Financing

Gardial GreenLights, a manufacturer of energy efficient lighting solutions, has had such success with its new products that it is planning to substantially expand its manufacturing capacity with a \$20 million investment in new machinery. Gardial plans to maintain its current 45% debt-to-total-assets ratio for its capital structure and to maintain its dividend policy in which at the end of each year it distributes 40% of the year's net income. This year's net income was \$8 million. How much external equity must Gardial seek now to expand as planned? Enter your answer in millions. For example, an answer of \$1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.

4. Stock Split
Fauver Enterprises declared a 3-for-1 stock split last year, and this year its dividend is \$1.70 per share. This total dividend payout represents a 10% increase over last year's pre-split total dividend payout. What was last year's dividend per share? Round your answer to the nearest cent.

#### Solution Summary

This response contains tutorials for financing in areas such as stock split, residual distribution policy, external equity.

\$2.49