Question

1.

PQR Inc. has a debt-equity ratio of 2 and one million shares outstanding. The firm’s pro-forma Statement of Comprehensive Income for the next year indicates that its net income will be $650,000. If the company proposes to invest 60% of its earnings in projects, what is the dividend per share?

Select one:

a. $0.34

b. $0.43

c. $0.52

d. $0.90

e. $1.20

2.

In terms of changes in the number of shares outstanding, a 25% stock dividend is equivalent to a ____________ stock split.

Select one:

a. six for five

b. six for four

c. five for three

d. five for four

e. seven for six

Answer 1

Answer 1 : c. $0.52

Answer 2 : d. five for four

Calculation :-

1. As given net income for next year is 650,000 and PQR Inc. want to invests its 60%. Means total investment will be 650,000 * 60% = 390,000.

And given its Debt-Equity ratio is 2.

So for investment of 390,000,

Debt = 390,000 * 2/3 = 260,000

Equity = 390,000 * 1/3 = 130,000

So assuming that debt cost has already been deducted from 650,000.

Then earning available to be distributed to shareholder as dividend will be 650,000 - 130,000 = 520,000

Dividend per share = 520,000 / 1,000,000

= $0.52

2. 25% stock dividend is equivalent to five for four stock split. Means after dividend value of 1 share will become 1.25. And also 5/4= 1.25.

Explanation :- Suppose investor has 4 share of 100 each. Then his dividend will be 400 * 25% = 100. If this dividend will be converted to stock then 1 more share will be issued to investor. So after getting this one share. He will now have 5 shares. So his stock split ratio is 5 for 4.