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Chapter 5: Q5BP (page 596)

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

Turtle co.

Hare corp.

Growth rate in sales and earnings

22%

4%

Cash as a percentage of total assets

5

20

Short Answer

Expert verified

The Turtle co should have a low dividend pay-out, and the Hare corp. It should have a high dividend pay-out.

Step by step solution

01

Dividend policy of Turtle co.

The company should have a low dividend pay-out.The company is growing at a high rate, i.e. 22%, and the cash percentage is low. i.e., 5%, so it should pay a low dividend to utilise the remaining cash balance for reinvestment.

02

Dividend policy of Hare corp.

The company can have a high dividend pay-out.The company has a growth rate of 4%, which is low, and its cash percentage is 20% which is high. So, the company can have a high dividend payout ratio as it does not require a lot of cash for reinvestment purposes.

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Most popular questions from this chapter

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

d. Compute the EPS and the price (P/E stays constant) after the new production facility begins to produce a profit.

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

c. Compute the earnings per share immediately after the stock issue.

The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder’s claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder’s claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder’s claims

\)900,000

Total liabilities and stockholder’s claims

\(8,500,000

c. Assuming the administrative costs of bankruptcy, workers’ allowable wages, and unpaid taxes add up to \)400,000, what is the total remaining asset value available to cover secured and unsecured claims?

Using the information in Problem 3, assume that American Health Systems’ 1,700,000 additional share can only be issued at $18 per share.

a. Assume that American Health Systems can earn 6 percent on the proceeds. Calculate earnings per share.

b. Should the new issue be undertaken based on earnings per share?

Explain how the zero-coupon rate bond provides return to the investor. What are the advantages to the corporation? (LO16-2)
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