Question 1: A firm paid total cash dividends of $265,029,000 and had net income

Question

Question 1: A firm paid total cash dividends of $265,029,000 and had net income of $1,282,725,000 in 2008. a. b. What is its dividend payout ratio? If it eaned $1.5 billion in 2009 and maintained the same dividend payout ratio that it paid in this year, what will the firm's total dividends be? Question 2: A firm currently has 8 million shares of stock outstanding that have a current market price of $12. If all else remains constant, what will be the share price after each of the following a b. c, d. A 20% stock dividend. A four-for-one stock split A 32.5% stock dividend What would be the total number of shares outstanding after parts a through c?

Explanation / Answer

1. Dividend payout ratio is the dividend paid to the shareholders relative to the company's net income

a) Dividend payout ratio = Dividend/Net Income
   = 265029000/1282725000
   =21%

b) Now dividend payout ratio is 21% and Net Income is $1,500,000,000

Dividend = Dividend payout ratio*Net Income
= 21%*1500000000
      = $315,000,000

2 a) With a 20% stock dividend, the number of shares of stock increases by 20%*8000000 = 1600000

Total number of shares outstanding = 9600000

Market value of the stock remains to be $12*8000000
   = $96,000,000
Share price = 96000000/9600000
Share Price =$10 after 20% stock dividend

b) For a four-for-one stock split, the no.of shares would increase to = 8000000*4 = 32000000

Market value of the stock remains the same = $96000000

Share price = 96000000/32000000
Share price = $3 post four for one stock split.

c) After 32.5% stock dividend , no. of shares increases by 32.5%*8000000 = 2600000
total number of shares outstanding = 8000000+2600000
   = 10600000
Market value remains the same = $96000000
Share price = 96000000/10600000
   = $9.06 per share post 32.5% stock dividend

d) After 20% stock dividend split total no. of shares outstanding = 9600000
    After four to one stock split, total no. of shares outstanding = 38400000 (9600000*4)
    After 32.5% stock dividend total no.of shares outstnading = 50880000( 38400000+32.5%*38400000)

After a through c total no.of shares outstanding is 50.88 million shares.

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