Question

1) Compare and contrast a sticky dividend policy with a residual dividend policy. Which policy is more widely used by large corporations? What advantages does that policy have over the other?

2) The dividend payout ratio equals dividends paid divided by earnings. How would you expect this ratio to behave during a recession? What about during an economic boom?

3) Tang Mine has 100,000 shares outstanding and just declared a 2-for-1 stock split. Before the announcement, the firm's shares were trading at RM50.00 per share. After the stock split, the firm's shares should trade at _____ per share.

4) The current stockholders’ equity account for Milo Farms is as follows:

Common stock (50,000 shares at $3 par)	$150,000
Paid-in capital in excess of par	$250,000
Retained earnings	$450,000
Total stockholders’ equity	$850,000

Milo has announced plans to issue an additional 5,000 shares of common stock as part of its stock dividend plan. The current market price of Milo’s common stock is $20 per share. Show how the proposed stock dividend would affect the stockholder’s equity account.

Answer 1

1 i)

Basis of Difference	Residual dividend policy	sticky dividend policy
Definition	A residual dividend policy is a dividend policy that comapnies use while calculating the dividend to be paid to the shareholders	Most companies set absolute dividend and stick with those dividend through good and bad times.These are called sticky dividend.
Nature	Flexible.It vary each year depending on how the business has performed	Rigid. It is consistent and reliable,even if business suffers a short turmoil

ii)Residual policy is more widely usedin the organisation as it is regarded as the most sustainable and logical dividend policy.

iii)A Residual dividend policy provides greater flexibilty to companies compared to other dividend policies,as it puts growth needs and investment before distribution

2)During the Recession stock prices will rise because companies start recovery before it actually happens .During the Recession as the company begins its recovery process, the dividend payout would generally be lowered by the comapany and the dividend payout wouldincrease during the boom in the economy .

3)Outstanding shares = 100,000

Stock split =2 for 1 stock split

Firm shares trading at RM 50 per share

Total Number of shares=200,000 shares

So after stock spllit it will be traded at 50/2= RM 25 PER SHARE

4)Additional stock =5000 shares at current market price of $20 per share

Common stock= (5000share *$3per share)= $15000

Paid-in capital in excess of par=(5000 share*$17)=$85000

Common stock($150,000+15,000)	$165,000
Paid-in capital in excess of par($250,000+85,000)	$335,000
Retained earnings	$450,000
Total stockholder equity	$950,000