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Chapter 14
Warm-up exercise questions

Stephanie’s Cafes, inc., has declared a dividend of $1.30 per share for shareholders of record on Tuesday, May 2. The firm has 200,000 shares outstanding and will pay the dividend on May24. How much cash will be needed to pay the dividend? When will the stock begin selling ex dividend?

E14- 2
Chancellor Industries has retained earnings available of $1.2 million. The firm plans to make two investments require financing of $950,000 and $1.75 million, respectively. Chancellor uses a target capital structure with 60% debt and 40% equity. Apply the residual theory to determine what dividends, if any, can be paid out and calculate the resulting dividend payout ratio.

Ashkenazi Companies has the following stockholders’ equity account:

Common stock (350,000 shares at $3 par)————$1,050,000
Paid-in capital in excess of par ————————–2,500,000
Retaining earnings——————————————-750,000
Total stockholders’ equity————————–$4,300,000

Assuming that state laws define legal capital solely as the par value of common stock, how much of a per-share dividend can Ashkenazi pay? If legal capital were more broadly defined to include all paid-in capital, how much of a per-share dividend could Ashkenazi pay?

The board of Kopi Industries is considering a new dividend policy that would set dividends at 60% of earnings. The recent past has witnessed earnings per share (EPS) and dividends paid per share as follows:

Year EPS Dividend/ share
2012 $1.75
2.25 $0.95

Based on Kopi’s historical dividend payout ratio, discuss whether a constant payout ratio of 60% would benefit shareholders.

The current stockholders’ equity account for Hilo 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

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



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