Question

On the 1st of May 2019 Tiger Plc split its stock for 2 for 1. The cash dividend is at £0.33 a quarter. The closing share price is £39.23.

i) What is the price of the share before the split?

ii) Could the adjustment in the price per share and cash dividends have been accomplished by a share dividend? What would the size of the share dividend need to be to accomplish this goal?

iii) What is the annual dividend yield before and after the split?

iv) Calculate the payout ratio given expected annual earnings in 2019 of £2.00 per share.

v) During the past 10 years the company’s payout ratio averaged about 60%. Discuss whether this is valuable information.

Answer 1

A) The price of the share before the split is 39.23*2 = £78.46

B) NO. The adjustment in the price per share and cash dividends have been accomplished by a share dividend because the cash dividend is not been issued to new shares that were created from a stock split if the split date occurs after the dividend's date of record. This is similar to how an investor does not receive dividends for stocks that were purchased after the dividend's record date.

C) The annual dividend yield before and after the split will be the same. a stock's dividend per share will be reduced as a result of a stock split, but the total amount of dividends paid doesn't change

D) Net Income (or EPS) = 2*78.46 = 156.92

DPR= total dividends​ / Net income = 0.22 / 156.92 = 0.210

E) In the past 10 years, the company’s payout ratio averaged about 60%. Yes, it is a piece of valuable information because it shows that it is a good performing company with a high dividend yield.