Chapter 16, Problem 1PS

a)

Summary Introduction

To discuss: The appropriate events in respective dates.

Explanation of Solution

Following are appropriates matched with respective events:

Date	Event
Friday, July 25	Declaration date
Monday, August 11	Last with-dividend date
Tuesday , August 12	Ex-dividend date
Thursday, August 14	Record date
Tuesday, September 2	Payment date

b)

Summary Introduction

To determine: The date at which the stock price is fell by $0.83 and the reason.

Explanation of Solution

The date is on August 12 and it was the ex-dividend date, the fall in price due to the buyers of the stock on the ex-dividend date are not included in the firm’s books prior to the record date and therefore they are not entitled to get the dividend and the price is fall by approximately the dividend amount.

c)

Summary Introduction

To determine: The dividend yield of the company E.

Dividend yield is the ratio between a firm’s yearly dividend to its share price and it is denoted as percentage.

Explanation of Solution

The formula to compute dividend yield is as follows:

$\text{Dividend yield = }\frac{\text{Annual dividend}}{\text{Stock price}}$

The computation of dividend yield is as follows:

$\begin{array}{c}\text{Dividend yield = }\frac{\left(\$0.83\times 4\right)}{\$71}\\ =.0468,\text{Or 4}\text{.68\%}\text{.}\end{array}$

Therefore, the dividend yield of company E is 4.68%.

d)

Summary Introduction

To determine: The payout ratio of the company E.

Payout ratio is the ratio which shows the amount of dividend that a firm gives out to its shareholders from its current earnings.

Explanation of Solution

The payout ratio is calculated as follows:

$\text{Payout ratio = }\frac{\text{Annual dividend}}{\text{Annual earnings}}$

The computation of payout ratio is as follows:

$\begin{array}{c}\text{Payout ratio }=\frac{\left(\$0.83\times 4\right)}{\$5.90}\\ =.5627\text{ Or 56}\text{.27\%}\end{array}$

Therefore, the payout ratio of the company E is 56.27%.

e)

Summary Introduction

To determine: The impact on stock price if the company E paid a 10% stock dividend.

Explanation of Solution

If the stock dividend is raised the number of shares outstanding without altering the market value of the firm, hence, the value per share will reduce.

The formula to compute expected stock price is as follows:

$\text{Expected stock price = }\frac{\text{Current price}}{\left(1+\text{dividend payout ratio}\right)}$

The computation of expected stock price is as follows:

$\begin{array}{c}\text{Expected stock price }=\frac{\$71}{1.10}\\ =\$64.55\end{array}$

Hence, the expected stock price is $64.55.