Assessment 7 | Complete Solution

Assessment 7

Problem 1. Dividends and Taxes: Midland, Incorporated has declared a $6.50 per share dividend and the stock is about to go ex-dividend. Calculate the ex-dividend price based on the following data:
Capital gains are not taxed.
There is a 12 percent tax rate on dividends.
Taxes must be withheld at the time the dividend is paid, according to new IRS regulations.

Midland sells for $76 per share.

Problem 2. Stock Splits and Stock Dividends: Billings Corporation (BC) currently has 365,000 shares of stock outstanding that sell for $72 per share. What will the share price be after:
BC has a five-for-three stock split?
BC has a 12 percent stock dividend?
BC has a 45 percent stock dividend?
BC has a five-for-seven reverse stock split?

Problem 3. Dividend Smoothing: The Deck Company just paid a dividend of $1.55 per share of stock. Its target payout ratio is 45 percent. In one year, the company expects to have earnings per share of $7.10. If the adjustment rate is .4, as defined in the Lintner model, what will the dividend be one year from now?

Problem 4. Stock Dividends: The market value balance sheet for Outland Manufacturing is shown in the table below. Outland has declared a 20 percent stock dividend. The stock goes ex-dividend tomorrow (chronology for a stock dividend is similar to that for a cash dividend). There are 45,000 shares of stock outstanding. Calculate the ex-dividend price.

Problem 4. Stock Dividends: Market Value Balance Sheet
Cash: $165,000.
Debt: $177,000.
Fixed Assets: $658,000.
Equity: $646,000.
Total: $823,000.
Total: $823,000.