Question

When a company pays a dividend, it isn't as simple as getting a paycheck from one's employer. There are several critical dates in the dividend payment process. Identify which critical dividend date relates to each of the statements. (Choose one per Statement)

Statements	Declaration Date	Holder-of-Record Date	Ex-Dividend Date	Payment Date
Minuteman Cafe Inc.'s board of directors announced that it will pay a $1 million dividend in three months on this date.
Minuteman Cafe Inc. actually sent the dividend checks to stockholders on this date.
Minuteman Cafe Inc.'s board of directors declared that whoever is listed as the owner of the stock on this date will receive the dividend for this year.
Minuteman Cafe Inc.'s board of directors set this date as the date on which the right to the current dividend no longer accompanies the stock.

Hackworth Hardware Company is one of Mainway’s leading competitors. Hackworth Hardware Company’s market intelligence research team shares Mainway’s plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Hackworth decide to offer stock dividends to its shareholders.

A stock dividend is another way of keeping the stock price from going too high. Hackworth currently has 2,300,000 shares of common stock outstanding.

If the firm pays a 4% stock dividend, how many shares will the firm issue to its existing shareholders?

A.) 92,000 shares C.) 96,600 shares

B.) 87,400 shares D.) 101,200 shares

Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains.

Consider the case of Petroxy Company:

Petroxy Company expects to earn $5,300,000 this year. The company currently has 870,000 shares outstanding, and the shares have a per-share market price of $22. Assuming that Petroxy’s price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the company’s expected market price per share—if it repurchases 85,000 shares at the current market price—should be__________.

A.) $30.46 C.) $21.93

B.) $23.15 D.) $24.37

Which of these factors are considered an advantage of a stock repurchase? Choose all that apply.

A.) The firm might pay too high a price for the repurchased stock.

B.) When a firm distributes cash by repurchasing stock, stockholders have the option to either sell or not sell stock.

C.) Stockholders who sell their stock back to the company might claim that they were not made fully aware of all implications of the repurchase.

Answer 1

Answer : Minuteman Cafe Inc.'s board of directors announced that it will pay a $1 million dividend in three months on this date is Declaration Date as it is date on which Board of Directors declare Dividend.

Minuteman Cafe Inc. actually sent the dividend checks to stockholders on this date is Payment Date. It is the date of Payment of Dividend to shareholder.

Minuteman Cafe Inc.'s board of directors declared that whoever is listed as the owner of the stock on this date will receive the dividend for this year is Holder-of-Record Date.It is that date onwhich the sahreholder appearing in the register is liable to receive Dividend.

Minuteman Cafe Inc.'s board of directors set this date as the date on which the right to the current dividend no longer accompanies the stock is Ex-Dividend date.

Answer : 2) Correct Option is (A.) 92,000 shares.

Reason :

Shares to be issued to existing shareholder is 92000 (2,300,000 * 4%)

Answer : Correct Option is D.) 24.37

Reason :

Calculation of Existing PE ratio

PE Ratio = Price / (Earning Available for equity shareholder / Number of shares Outstanding)

= 22 / (5,300,000 / 870,000)

= 22 / 6.09195402298

= 3.61132075472

Calculation of New Price = [Earning Available for equity shareholder / (Number of shares Outstanding - Number of shares Repurchased)] * PE Ratio

= [5,300,000 / (870000 - 85000)] * 3.61132075472

= 24.37

Answer : Correct Option is B.) When a firm distributes cash by repurchasing stock, stockholders have the option to either sell or not sell stock.

Reason :

This is one of the advantage of Stock Repurchase that shareholders may or may not sell it.