BF3326 – Corporate Finance

Tutorial Questions
Dividen and Dividen Policy

Answer ALL Questions

1. Portland Plastics Inc. has the following data. If it follows the residual dividend model, what is its
forecasted dividend payout ratio?

Capital budget $12,500

% Debt 40%
Net income (NI) $11,500

Answer 34.78

2. Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per
share. If the firm's total market value is unchanged by the split, what will the stock price be following
the split?

Answer 40.00

3. Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90
per share. The firm's total market value was unchanged by the split. Other things held constant, what
is the best estimate of the stock's post-split price?

Answer 30.00

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BF3326 – Corporate Finance
Tutorial Questions
Dividen and Dividen Policy

4. Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital
structure of 40% debt and 60% equity, and it also wants to pay a dividend of $225,000. If the company
follows the residual dividend model, how much net income must it earn to meet its investment
requirements, pay the dividend, and keep the capital structure in balance?

Answer 615,000

5. Ring Technology has a capital budget of $850,000, it wants to maintain a target capital structure of
35% debt and 65% equity, and it also wants to pay a dividend of $400,000. If the company follows
the residual dividend model, how much net income must it earn to meet its capital budgeting
requirements and pay the dividend, all while keeping its capital structure in balance?

Answer If952,500

6. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure
of 45% debt and 55% equity, and she also wants to pay a dividend of $500,000. If the company follows
the residual dividend model, how much income must it earn, and what will its dividend payout ratio
be?

Answer
Income 4898,750
Dividend payoutratio 55.63

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BF3326 – Corporate Finance
Tutorial Questions
Dividen and Dividen Policy

7. Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its
forecasted net income is $550,000, and its board of directors has decreed that no new stock can be
issued during the coming year. If the firm follows the residual dividend model, what is the maximum
capital budget that is consistent with maintaining the target capital structure?

Answer 785,714

8. Torrence Inc. has the following data. If it uses the residual dividend model, how much total
dividends, if any, will it pay out?

Capital budget $1,000,000

% Debt 60%
Net income (NI) $625,000

Answer H 225,000

9. Hadron NY Fashions has the following data. If it follows the residual dividend model, how much
total dividends, if any, will it pay out?

Capital budget $1,500,000

% Debt 65%
Net income (NI) $550,000

Answer 25,000

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BF3326 – Corporate Finance
Tutorial Questions
Dividen and Dividen Policy

10. Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend
model, what will its dividend payout ratio be?

Capital budget $5,000

% Debt 45%
Net income (NI) $5,300

Answer 48.11

11. Moving Company has the following data, dollars in thousands. If it follows the residual dividend
model, what will its dividend payout ratio be?

Capital budget $5,000

% Debt 45%
Net income (NI) $7,000

Answer 60.71

12. New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its
forecasted dividend payout ratio?

Capital budget $7,500

% Debt 35%
Net income (NI) $6,500

Answer 25

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BF3326 – Corporate Finance
Tutorial Questions
Dividen and Dividen Policy

13. The Ross-Jordan Financial has suffered losses in recent years, and its stock currently sells for only
$0.50 per share. Management wants to use a reverse split to get the price up to a more “reasonable”
level, which it thinks is $25 per share. How many of the old shares must be given up for one new
share to achieve the $25 price, assuming this transaction has no effect on total market value?

currentprice Ho 50
Targetprice 25

Old shares to be surrendered forevery1newshore

Targetprice as 50shares
old price o.ro

14. The Readata Corporation practices a strict residual dividend policy and maintains a capital structure of 60
percent debt, 40 percent equity. Earnings for the year are $5,000. What is the maximum amount of capital
spending possible without selling new equity? Suppose that planned investment outlays for the coming
year are $12,000. Will Readata be paying a dividend? If so, how much?

Debtequityratio 60140 i to Planned capitalinvestmentis

without newequity
Amount
of spending
12 ooo Equity com
Debt co.co
It meansusing income newdeats
use bestequityratio equitysource willbe 12ooo xo 4
Newdebt 4 soo
i
c.ua n oo

Total available tenoigwithout Dividend

issued newequity soo
Income t newdat
5 out 7 soo 412soo
15. Red Zeppelin Corporation follows a strict residual dividend policy. Its debt–equity ratio is 2.5.
• If earnings for the year are $190,000, what is the maximum amount of capital spending possible with
no new equity?
• If planned investment outlays for the coming year are $760,000, will Red Zeppelin pay a dividend? If
so, how much?
• Does Red Zeppelin maintain a constant dividend payout? Why or why not?
peut equityRatio 25 available capital without new
amount
of spending withoutnew shores 665ooo
equi4 i Ig Investmentoutlayis 47601000
Income t Newdebt whichis more than available
capital the companycannot

a.mn 5|Page
475 ooo o
policy the companyonlywaysdividend
total availablecapital
ifthere are leftoversfrom incomelearning
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constant
i i
dividend payout