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

Boswell Manufacturing Company has been in business for five years. Thecompany has now decided to expand its operations. To finance this process, the company is considering two approaches: (1) Lease the assets that are needed on a long term basis or (2) Issue bonds and use the proceeds to purchase the assets. The CEO is seeking your advice on the matter. Without knowledge of the comparative cost involved, how would you advise him in the following questions: (i) What might be the advantages and disadvantages of leasing the assetsinstead of owning them. (List at least three advantages and threedisadvantages) (ii) How will leasing the assets instead of owning them affect the financialstatements?

Answer 1

Question

Chapter 15, 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.

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Boswell Manufacturing Company has been in business for five years. Thecompany has now decided to expand its operations. To finance this process, the company is considering two approaches: (1) Lease the assets that are needed on a long term basis or (2) Issue bonds and use the proceeds to purchase the assets. The CEO is seeking your advice on the matter. Without knowledge of the comparative cost involved, how would you advise him in the following questions: (i) What might be the advantages and disadvantages of leasing the assetsinstead of owning them. (List at least three advantages and threedisadvantages) (ii) How will leasing the assets instead of owning them affect the financialstatements?

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…

Question 1 (a) Explain how the Fisher separation theory shows that, under certain conditions, shareholders can delegate to managers the task of choosing which physical investment projects to undertake. What specific conditions must hold for this to be true? (b) PJP, an industrial manufacturer, is considering a new capital investment project to make and produce and sell a new type of electrical generator. The first stage of the project requires an investment of $8,000 now for the initial design and market research. There is a 40% probability that this phase will be successful. If it is not successful (probability 60%), the project will be abandoned with zero salvage value. If the first stage is successful, a further investment of $300,000 will be required one year from now to make and test prototype generators. If this second stage is not successful (probability 55%), the prototypes could be sold for $40,000. If it is successful (probability 45%), PJP would go ahead and produce the…

Answer 2

Question

Chapter 15, 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.

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Answer 3

Question

Chapter 15, 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.

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Answer 4

Question

Chapter 15, 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.

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Answer 5

Chapter 15, 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 15, 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 15, 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

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Answer 35

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Ch. 15 - Discuss the pros and cons of having the directors...Ch. 15 - Prob. 2Q Ch. 15 - Would it ever be rational for a form to barrow...Ch. 15 - Modigliani and Miller (MM), on the one hand, and...Ch. 15 - How would each of the following changes tend to...Ch. 15 - One position expressed in the financial literature...Ch. 15 - Prob. 7Q Ch. 15 - What the difference between a stock dividend and a...Ch. 15 - Most firms like to have their stock selling at a...Ch. 15 - 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

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 15 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

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 15 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