June Maylyn D.

Marzo
BSAIS 3rd year
Topic 9: Dividend Policy

Essay

1. Why did most of the investors prefer capital gains than dividends pay-out?
Investors prefer Capital Gains than Dividends Pay-Out because dividends are taxable whether it is classified as
ordinary or qualified. Capital gains is also taxable but it is different than dividends. Because it is based on
whether it is short-term or long-term holdings.

2. Why is it important to investors to know the ex-dividend date?

Ex-Dividend Date is important to the investors because it's the cut-off period for you to buy shares of a company
and receive the dividends for the next pay-out date. So, in order for shareholders to get paid the upcoming
dividend, they must own shares of the dividend-yielding stock at least one day prior to the ex-dividend date.

3. How do stock dividends and splits affect stock prices?

When a company decides to issue a Stock Split (or stock dividend), any upcoming cash dividends can be affected
in a couple of ways. In most cases, the dividend will be adjusted along with the share price. The factors to
consider are the date of the stock split and the time of the cash dividend's record date.

Problems
Problem A
Tinky-Winky Co. has a capital budget of P1.2 million. Tinky-Winky Co. has 10,000 outstanding shares. The company
maintains a capital structure that is 60% debt funded. The company projects that its net income this year will be
P600,000. The company follows a residual dividend policy.
1. The amount to be financed by equity is. ANSWER: P 480,000
Capital Budget- P 1,200,000
Debt (60%) - x 60%
Fund for Debt - 720,000
Equity (40%) - P 480,000
Capital Budget- P 1,200,000

2. What will be its payout ratio? ANSWER: 20%

Pay-out ratio= Dividend/Net Income
Dividend - P 120,000
Net Income- / 600,000
Pay-out ratio= 20%

3. How much is the dividends per share? ANSWER: P 12

Dividends per share= Total Dividends/No. of outstanding shares
Total Dividend - P 120,000
No. of outstanding shares - / 10,000
Dividends per share = P 12

Problem B
Laa-Laa Co. utilizes the residual dividend model to determine its ordinary dividend payout. This year the
company expects its net income to be P2,000,000, and it expects to retain 75% of the income. The company’s
target ordinary equity ratio is 40%, and the firm is financed with only ordinary equity and debt.
1. How much is the addition to retained earning? ANSWER: P 1,500,000
Net Income = P 2,000,000
Dividends (25%) = 25%
Fund for Dividend= 500,000
RE (75%) = P 1,500,000
Net Income = P 2,000,000

2. What is the plowback ratio? ANSWER: 75%

 Plowback Ratio- 1 - Dividend/Net Income
PR= 1 – (500,000/2,000,000)
PR= 75%

3. What is the company’s forecasted total capital budget for the year? ANSWER: P 3,750,000
Forecasted Capital Budget- Retained Earnings/Equity Ratio
RE = P 1,500,000
ER = / 40%
FCP= P 3,750,000

Problem C
Dipsy Corp. recently completed a 2-for-1 stock split. Before the split, the company had 10,000,000 shares
outstanding and its stock price was P150 per share. After the split, the total market value of the company’s
stock equaled P1.5 billion. The total share capital balance of Dipsy Corp. is P350,000,000.
1. What was the price of the company’s stock following the stock split? ANSWER: P 75
New Stock Price- Old Stock Price/Share-split provision
OSP = P 150
SSP = / 2
NSP = P 75

2. Determine the new par value of each shares. ANSWER: P 75

New Par Value- Old Stock Price/Share-split provision
OSP = P 150
SSP = / 2
NPV = P 75

Problem D
Po Inc. believes that at its current share price of P16.00 the firm is undervalued. Makeover plans to
repurchase 2.4 million of its 20 million shares outstanding. The Po Inc.’s managers expect that they can
repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase. The Po Inc.’s
current earnings are P44,000,000. If management’s assumptions hold, answer the following,
1. The current earnings per share is ANSWER: P 2.2
Current Earnings per share- Current Earnings/Share Outstanding
CE = P 44,000,000
SO = / 20,000,000
CE/share = P 2.2

2. What is the price to earnings ratio? ANSWER: 7.27

Price to Earnings Ratio- Current share price/Current Earnings per share
CSP = P 16
CE/share = / 2.2
P to E ratio = 7.27

3. How much is the earnings per share after the repurchase? ANSWER: P 2.5
Earnings per share after the repurchase- Current Earnings/(Shares Outstanding - Repurchase)
CE = P 44,000,000
(20,000,000 – 2,400,000) = / 17,600,000
E/ S after the repurchase = P 2.5

4. What is the expected per-share market price after repurchase? ANSWER: P 18.18
Expected/share market price after repurchase- Price to earnings ratio x EPS after the repurchase
P to E ratio = 7.27
EPS after the repurchase= x P 2.50
E/ SMP after repurchase= P 18.18