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Dividend Policies and Stock Splits

5. The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.

Mathews Co. Aaron Corp.
Growth rate in sales and earnings . . . . . . . . . . . . . . 5% 20%
Cash as a percentage of total assets . . . . . . . . . . . 15% 2%

18. The Wallace Corporation has done very well in the stock market during the last three years-its stock has risen from $18 per share to $44 per share.
Its current statement of net worth is:

Common stock (3 million shares issued
at par value of $10 per share,
9 million shares authorized). . . . . . . . . . . . . .$30,000,000
Paid-in capital in excess of par . . . . . . . . . . . . . . . . . 15,000,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000,000
Net worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90,000,000

a. What changes would occur in the statement of net worth after a two-for-one stock split?
b. What would the statement of net worth look like after a three-for-one stock split?
c. Assume Wallace Corporation earned $6 million. What would its earnings per share be before and after a two-for-one stock split and after a three-for-one stock split?
d. What would the price per share be before and after the two-for-one and the three-for-one stock splits? (Assume that the price-earnings ratio of 22 stays the same.)
e. Should a stock split change the price-earnings ratio for Wallace?

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5. The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.
Mathews Co. Aaron Corp.
Growth rate in sales and earnings . . . . . . . . . . . . . . 5% 20%
Cash as a percentage of total assets . . . . . . . . . . . 15% 2%

Aaron Corp.: Distribute Low proportion of current earnings as dividends (to conserve cash for future investments). The growth rate in sales is high which means that the company would need cash for expansion in sales. The growth rate in earnings is high which means that the return on investment is high. Therefore, it makes sense to use internally generated funds to fund the growth. Cash as a percentage of total assets is low which means that if the company gives out high dividends, it would be short of cash and would need to raise it from external sources.

Mathews Co..: Distribute High proportion of current earnings as dividends. The growth rate in sales is modest which means that the company's ...

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