2. Drew Financial currently pays a quarterly dividend of 50 cents per share. This
quarters dividend will be paid to stockholders of record on Friday, Feb 22, 2007.
Drew has 200,000 common shares outstanding. The retained earnings account has a
balance of $15 million before the dividend, and drew holds $2.5 million in cash.
a. What is the ex-dividend date for this quarter?
Ex-dividend day is Wednesday, February 20.
b. Drews stock traded for $22 per share the day prior to the ex-dividend date. What
would you expect the stock price to open at on the ex-dividend date? Give some
reasons why this might not occur.
Stock price should decline by $0.50 to $21.50 per share. Other occurrences in
the financial markets might cause this not to happen, such as changing interest
and inflation rate expectations, a changing economic outlook, or some other
firm-specific event (e.g. a new competitor).
c. What is the effect of the dividend payment on Drew's cash, retained earnings and
total assets?
Dividends = ($0.50)(200,000) = $100,000
Cash declines by $100,000 as does the retained earnings account and total
assets.
3. Winkie Baking has just announced a 100% stock dividend. The annual cash
dividend per share was $2.40 before the stock dividend. Winkie intends to pay $1.40
per share on each of the new shares. Compute the percentage increase in the cash
dividend rate that will accompany the stock dividend.
Pre-split dividend equivalent:
2 x $1.40 = $2.80
Increase in cash dividend rate = (2.80 - 2.40)/2.40 = .167 or 16.7%
increase
4. Wolverine Corp plans to pay a $3 dividend per share of each of its 300,000 shares
next year. Wolverine anticipates earnings of $6.25 per share over the year. If the
company has a capital budget requiring an investment of $4 million over the year and
it desires to maintain its present debt to total assests (debt ratio) of 0.40, how much
external equity must it raise?
Assume Wolverine capital structure includes only common equity and debt, and that
debt and equity will be the only sources of funds to finance capital projects over the
year.
Retention for coming year:
$6.25 - $3.00 = $3.25/share
300,000 shares x $3.25/share = $975,000 total retained equity for year
Equity portion of capital budget requirements:
0.60($4,000,000) = $2,400,000
External equity needed: $2,400,000 - 975,000
= $1,425,000
5. Tulia Dairy pays a $2.50 cash dividend and earns $5 per share. The cash dividend
has recently been increased to $2.65 per share, and a 3 percent stock dividend has
been declared. What is the effective rate of increase in the dividends for Tulia as a
result of this action?
Equivalent (pre-stock dividend) dividend per share:
$2.65(1 + .03) = $2.73
Dividend rate increase = (2.73 - 2.50)/2.50 = 0.092 or 9.2%