Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years)

Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months have been a real cash drain on the company, however, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only day-to-day operating needs, the president, Gil Mailor, has decided that a stock dividend instead of a cash dividend should be declared. He tells Greenwood’s financial vice-president, Vicki Lemke, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend. “Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend,” he orders. “Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens.”

Instructions
(a) Who are the stakeholders in this situation?
(b) Is there anything unethical about president Mailor’s intentions or actions?
(c) What is the effect of a stock dividend on a corporation’s stockholders’ equity accounts? Which would you rather receive as a stockholder—a cash dividend or a stock dividend? Why?


Click here for the solution: Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years)

Fleming, Inc. had a dividend payout ratio of 25% this year, which resulted in a payout of $80,000 in dividends

Fleming, Inc. had a dividend payout ratio of 25% this year, which resulted in a payout of $80,000 in dividends. Return on sales (ROS) was 8% this year and is expected to increase to 9% next year. If Fleming expects to have $305,100 available from next year’s retained earnings, what percent increase is it forecasting in revenues?


Click here for the solution: Fleming, Inc. had a dividend payout ratio of 25% this year, which resulted in a payout of $80,000 in dividends

A company, has EBIT of $2,000,000, total assets of $20,000,000 preferred dividends of $250,000 and is taxed at a rate of 40%

A company, has EBIT of $2,000,000, total assets of $20,000,000 preferred dividends of $250,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment.

Capital Structure debt ratio cost of debt, kd No. of common stock shares required return, ks
0.00% 0.00% 200,000 10.00%
15 8 170,000 11.00%
30 9 150,000 12.00%
45 12 110,000 14.00%
60 15 80,000 18.00%

Calculate earnings per share for each level of indebtedness. Use the grid for the answer
Debt Ratio 0.00% 15.00% 30.00% 45.00% 60.00%
EBIT
Less Interest
EBT
Taxes at 40%
Net Profit
Less Preferred Div
Profits avail. to Common Stockholders
Number of shares
EPS

Use the following equation P0 = EPS/ Rs (Po is the per share value, EPS is the earnings per share and Rs is the required return). Calculate the price per share for each level of indebtedness. Choose the best capital structure. Why?


Click here for the solution: A company, has EBIT of $2,000,000, total assets of $20,000,000 preferred dividends of $250,000 and is taxed at a rate of 40%

Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000

E13-4 Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker's degree of financial leverage (DFL) at a base level of EBIT of $20,000?

Click here for the solution: Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000

IP Inc is expected to pay $1.70 dividends next year

IP Inc is expected to pay $1.70 dividends next year. The dividend growth rate is expected to be 7% forever. If the required rate of return for IP is 10% calculate the price of the stock using the constant growth model. If the stock is currently selling for $63, indicate whether the stock is underpriced or overpriced.

Click here for the solution: IP Inc is expected to pay $1.70 dividends next year