Chapter 14

CHAPTER 14
DIVIDENDS AND DIVIDEND POLICY
Solutions to Questions and Problems
Basic
NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem.
1.

With no taxes we would expect the stock price to drop by exactly the amount of the dividend, so the new stock price will be:
New stock price = $87.00 – 1.90
New stock price = $85.10
Your total stock investment will be worth:
Stock value = 180 × $85.10
Stock value = $15,318

2.

Your total portfolio value will be the total stock value plus the dividends received, so:
Portfolio value = $15,318 + (180 × $1.90)
Portfolio value = $15,660

3.

The aftertax dividend is the pretax dividend times one minus the tax rate, so:
Aftertax dividend = $1.65(1 – .15)
Aftertax dividend = $1.40
The stock price should drop by the aftertax dividend amount, or:
Ex-dividend price = $24.00 – 1.40
Ex-dividend price = $22.60

4.

a.

The shares outstanding increases by 10 percent, so:
New shares outstanding = 30,000(1.10)
New shares outstanding = 33,000
New shares issued = 3,000
Since the par value of the new shares is $1, the capital surplus per share is $41. The additional capital surplus is therefore:
Capital surplus on new shares = 3,000($41)
Capital surplus on new shares = $123,000
The new equity account balances will be:
Common stock ($1 par value)
Capital surplus
Retained earnings

b.

$ 33,000
308,000
484,000
$825,000

The shares outstanding increases by 25 percent, so:
New shares outstanding = 30,000(1.25)
New shares outstanding = 37,500
New shares issued = 7,500
Since the par value of the new shares is $1, the capital surplus per share is $41. The additional capital surplus is therefore:
Capital surplus on new shares = 7,500($41)
Capital surplus