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14.1 Dividend Policy Irrelevance. How is it possible that dividends are so important, but, aL the same time, dividend policy is irrelevant?

14.2 Stock Repurchases. What is the impact of a stock repurchase on a company's debt ratio? Does this suggest another use for excess cash?

14.3 Dividend Policy. What is the chief drawback to a strict residual dividend policy? Why is this a problem? How does a compromise policy work? How does it differ from a strict residual policy?

14.4 Dividend Chronology. On Tuesday. December 8. Hometown Power Co.'s board of directors declares a dividend of 75 cents per share payable on Wednesday, January 17, to shareholders of record as of Wednesday, January 3. When is the ex-dividend date? If a shareholder buys stock before that date, who gets the dividends on those shares, the buyer or the seller?

14.5 Alternative Dividends. Some corporations, like one British company that offers its large shareholders free crematorium use. pay dividends in kind (that is. offer their services to shareholders at below-market cost). Should mutual funds invest in stocks that pay these dividends in kind? (The fundholders do not receive these services.)

14.6 Dividends and Stock Price. If increases in dividends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant?

14.7 Dividends and Stock Price. Last month, Central Virginia Power Company, which had been having trouble with cost overruns on a nuclear power plant that it had been building, announced that it was "temporarily suspending dividend payments due to the cash flow crunch associated with its investment program," The company's stock price dropped from $28.50 to $25 when this announcement was made. How would you interpret this change in the stock price (that is, what would you say caused il)?

14.8 Dividend Reinvestment Plans. The DRK Corporation has recently developed a dividend reinvestment plan (DRIP). The plan allows investors to reinvest cash dividends automatically in DRK in exchange for new shares of stock. Over time, investors in DRK will be able to build their holdings by reinvesting dividends to purchase additional shares of the company.

Over 1,000 companies offer dividend reinvestment plans. Most companies with DRIPs charge no brokerage or service fees. In fact, the. shares of DRK will be purchased at a 10 percent discount from the market price.

A consultant for DRK estimates that about 75 percent of DRK's shareholders will take part in this plan. This is somewhat higher than the average.

Evaluate DRK's dividend reinvestment plan. Will it increase shareholder wealth? Discuss the advantages and disadvantages involved here.

14.9 Dividend Policy, During 2006, 198 companies went public with common stock offerings, raising a combined total of $44.1 billion. Relatively few of these 198 companies involved paid cash dividends. Why do you think most chose not to pay dividends?

14.10 Investment and Dividends. The Phew Charitable Trust pays no taxes on its capital gains or on its dividend income or interest income. Would it be irrational for it to have low-dividend, high-growth stocks in its portfolio? Would it be irrational for it to have municipal bonds in its portfolio? Explain.

gasic 1. Dividends and Stock Prices. Your portfolio is 200 shares of Blue Morning, Inc.

(Questions 1-15) The stock currently sells for $96 per share. The company has announced a dividend of $2.50 per share with an ex-dividend date of April 19. Assuming no taxes, how much will your stock be worth on April 19?

2. Dividends and Stock Prices. It is April 19. Using the information in the previous problem, what is your total portfolio value?

3. Dividends and Taxes. Lyons, Inc., has declared a S6.40 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Lyons sells for $108 per share, and the stock is about to go ex-dividend. What do you think the ex-dividend price will be?

4. Stock Dividends. The owners' equity accounts for Trans World International are shown here:

Capital surplus 170,000

Retained earnings 530,000

Total owners' equity $725,000

o o a. If Trans World stock currently sells for S35 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity accounts would change.

b. If Trans World declared a 25 percent stock dividend, how would the accounts change?

5. Stock Splits. For the company in Problem 4, show how the equity accounts will change if:

a. Trans World declares a two-for-one stock split. How many shares are outstanding now? What is the new par value per share?

b. Trans World declares a one-for-five reverse stock split. How many shares are outstanding now? What is the new par value per share'.'

6. Stock Splits and Stock Dividends. Bermuda Triangle Corporation (BTC) currently has 400,000 shares of stock outstanding that sell for $92 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:

a. BTC has a five-for-three stock split?

b. BTC has a 15 percent stock dividend?

c. BTC has a 42.5 percent stock dividend?

d. BTC has a four-for-seven reverse stock split?

e. Determine the new number of shares outstanding in parts (a) through (d).

7. Regular Dividends. The balance sheet for Impossible Odds, Inc., is shown here in market value terms. There are 35,000 shares of stock outstanding.

Market Vafue Balance Sheet


$ 90,000

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