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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 will the adjusted EPS and DPS be? Round your answers to the nearest cent.

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.

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Solution Summary

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

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See Also This Related BrainMass Solution

Dividend Payout Ratio, Value of Operations, Stock Split & External Equity

1) Peterson company has a capital budget of $1.2 million. The company wants to maintain a target capital structure which is 60% debt and 40% equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual distribution model and pays all distributions as dividends, what will be it's payout ratio?

2) the Wei corporation expects next years net income to be $15 million. The firm's debt ratio is currently 40%. Wei has $12 million of profitable investment opportunities, and it wishes to maintain it's existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Wei's dividend payout ration be next year.

3) A firm has 10 million shares outstanding with a market price of $20 per share. The firm has $25 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm's value of operations, and how many shares will remain after the purchase?

4) Suppose you own 2,000 common shares of Laurance Incorporated. The EPS is $10.00, the DPS is $3,000, and the stock sells for $80 per share. Laurance announces a 2-for-1 split. Immediately after the split, how many shares will you have, what will the adjusted EPS and DPS be, and what would you expect the stock price be?

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