Dividend policy. Introduction: Stock Dividend: When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Question

Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new con-tinuous casting process. SSC’s founders, Donald Brown and Margo Valencia, had been employed in the research department of a major integrated-steel company, but when that company decided against using the new process (which Brown and Valencia had developed), they decided to strike out on their own. One advantage of the new process was that it required relatively little capital compared to the typical steel company, so Brown and Valencia have been able to avoid issuing new stock and thus own all of the shares. However, SSC has now reached the stage in which outside equity capital is necessary if the firm is to achieve its growth targets yet still maintain its target capital structure of 60% equity and 40% debt. Therefore, Brown and Valencia have decided to take the company public. Until now, Brown and Valencia have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm,…

Answer 1

Question

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Students have asked these similar questions

Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new con-tinuous casting process. SSC’s founders, Donald Brown and Margo Valencia, had been employed in the research department of a major integrated-steel company, but when that company decided against using the new process (which Brown and Valencia had developed), they decided to strike out on their own. One advantage of the new process was that it required relatively little capital compared to the typical steel company, so Brown and Valencia have been able to avoid issuing new stock and thus own all of the shares. However, SSC has now reached the stage in which outside equity capital is necessary if the firm is to achieve its growth targets yet still maintain its target capital structure of 60% equity and 40% debt. Therefore, Brown and Valencia have decided to take the company public. Until now, Brown and Valencia have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm,…

Your employer, a midsized human resources management company, is considering expansion intorelated fields, including the acquisition of Temp ForceCompany, an employment agency that supplies wordprocessor operators and computer programmersto businesses with temporarily heavy workloads.Your employer is also considering the purchase ofBiggerstaff & McDonald (B&M), a privately heldcompany owned by two friends, each with 5 millionshares of stock. B&M currently has free cash flow of$24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements reportshort-term investments of $100 million, debt of $200million, and preferred stock of $50 million. B&M’sweighted average cost of capital (WACC) is 11%.Answer the following questions: . (1) Write out a formula that can be used to valueany dividend-paying stock, regardless of itsdividend pattern.(2) What is a constant growth stock? How areconstant growth stocks valued?(3) What happens if a company has…

1) Brandon Production is a small firm focused on the assembly and sale of custom computers. The firm is facing stiff competition from low-priced alternatives, and is looking at various solutions to remain competitive and profitable. Current financials for the firm are shown in the table below. In the first option, marketing will increase sales (and costs) by 50%. The next option is Vendor (Supplier) changes, which would result in a decrease of 12% in the cost of inputs. Finally, there is an OM option, which would reduce production costs by 25%. Which of the options would you recommend to the firm if it can only pursue one option? In addition, comment on the feasibility of each option. Business Function Current Value Cost of Inputs $50,000 Production Costs $30,000 Revenue $83,000

Answer 2

Question

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Answer 3

Question

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Answer 4

Question

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Answer 5

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Answer 6

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Answer 7

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Answer 8

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

Answer 9

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

Answer 10

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

Answer 11

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

Answer 12

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

Answer 13

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

Answer 14

(2)

Summary Introduction

To discuss: Clientele effect.

Answer 15

(2)

Summary Introduction

To discuss: Clientele effect.

Answer 16

(3)

Summary Introduction

To explain: Catering theory.

Answer 17

(3)

Summary Introduction

To explain: Catering theory.

Answer 18

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

Answer 19

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

Answer 20

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

Answer 21

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

Answer 22

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

Answer 23

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

Answer 24

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

Answer 25

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

Answer 26

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

Answer 27

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

Answer 28

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

Answer 29

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

Answer 30

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

Answer 31

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

Answer 32

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Answer 33

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Answer 34

Expert Solution & Answer

Answer 35

Expert Solution & Answer

Answer 36

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Answer 37

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Answer 38

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Answer 39

Trending nowThis is a popular solution!

Answer 40

Trending nowThis is a popular solution!

Answer 41

Trending nowThis is a popular solution!

Answer 42

Trending now

Answer 43

This is a popular solution!

Answer 44

See solution

Check out sample textbook solution

Answer 45

Ch. 14 - Prob. 1Q Ch. 14 - Prob. 2Q Ch. 14 - Would it ever be rational for a firm to borrow...Ch. 14 - Modigliani and Miller (MM), on the one hand, and...Ch. 14 - Prob. 5Q Ch. 14 - One position expressed in the financial literature...Ch. 14 - Prob. 7Q Ch. 14 - What is the difference between a stock dividend...Ch. 14 - Most firms like to have their stock selling at a...Ch. 14 - Prob. 10Q

Dividend policy. Introduction: Stock Dividend: When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Solution Summary: The author explains the difference between a stock dividend or scrip dividend and the value of the firm under dividend irrelevance theory.

Concept explainers

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

To explain: Dividend irrelevance theory and assumptions underlying the theory.

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

To discuss: The information content or signaling, hypothesis.

To discuss: Clientele effect.

To explain: Catering theory.

To explain: The effect of catering theory on dividend policy.

To calculate: Amount to be raised through equity.

To calculate: Payout ratio and the effect on it under the residual dividend model.

To explain: advantages and disadvantages of residual policy.

To determine: The series of steps that many company’s take in setting dividend policy in practice.

To explain: dividend reinvestment plan and its working.

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

To explain: Stock repurchase and its advantages and disadvantages.

Chapter 14 Solutions

Dividend policy. Introduction: Stock Dividend: When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Solution Summary: The author explains the difference between a stock dividend or scrip dividend and the value of the firm under dividend irrelevance theory.

Concept explainers

To explain: Dividend policy. Introduction: Stock Dividend: When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

To explain: Dividend irrelevance theory and assumptions underlying the theory.

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

To discuss: The information content or signaling, hypothesis.

To discuss: Clientele effect.

To explain: Catering theory.

To explain: The effect of catering theory on dividend policy.

To calculate: Amount to be raised through equity.

To calculate: Payout ratio and the effect on it under the residual dividend model.

To explain: advantages and disadvantages of residual policy.

To determine: The series of steps that many company’s take in setting dividend policy in practice.

To explain: dividend reinvestment plan and its working.

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

To explain: Stock repurchase and its advantages and disadvantages.

Chapter 14 Solutions

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend