Question

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3. You are given the following: Net income to common shareholders = $390 million Number of...

3. You are given the following:
Net income to common shareholders = $390 million
Number of common shares outstanding = 243,750,000
Payout ratio = 50%
Current Price Per Share = $55
b. Calculate dividends per share
c. Calculate the dividend yield
d. If the dividend yield for similar firms is 2.5%, what would you expect from investors?
4. You hold 1,500 shares in the XYZ Corporation. The 2016 year-end price per share was $125.
Last week, the Corporation announces a 2-1 stock split.
a. Calculate the total value of your shares at year-end 2016
b. Calculate the total value of your shares the day following the stock split (show your work).
5. Suppose the MMM Company has a stock price of $240 and has decided on a 3-1 stock split.
a. Calculate the new price per share.
b. Without using numbers, what do you think the EPS will reflect after the stock split?

Solutions

Expert Solution

3.

total earnings = 390,000,000

no of common shares outstanding = 243,750,000

dividend payout ratio = 50% = 195,000,000

so

(b) dividend per share = 195,000,000/ 243,750,000 =0.8 per share

(c) dividend yield = dividend per share/market price = 0.8/55 =0.01454 = 1.454%

(d) the investor prefers regular cash flow by way of dividend and it is tax free source of income , so they may leave this company and invest in other companies where the dividend yield is higher.

4.

holding =1500 shares, stock split 2-1

stock split 2-1 means, one share for every one share held

so no of shares will double and price will be half

total value of shares does not change

(a) present value of all shares = 215 x 1500 =322500

(b) after stock split no of shares will be doubled = 1500 x2 =3000

now new price per share = 215/2 =107.5

so total value = 107.5 x 3000 =322500

no change in total value of shares

5.

new price per share = 240/3 =80

the EPS will be 1/3rd of the original EPS

e.g., if EPS was 21, stock split 3-1, then new EPS will be 21/3 = 7

Go through it, Any doubts, please feel free to ask, Give positive feedback, Thank you

jeff jeffy answered 2 years ago
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