a ABC Company had total earnings last year of 5,000,000, but expects total earnings to drop to 4,750,000 this year because of a slump in the housing industry There are currently 1,000,000 shares of common stock outstanding The company has 4,000,000 worth of investments to undertake this year The company finances 40 of its investments with debt and 60 with equity capital The company paid 3 00 per share in dividends last year If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year Discuss the pros and cons of this policy from the perspective of company and shareholders If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year Discuss the pros and cons of this policy from the perspective of company and shareholders If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year Discuss the pros and cons of this policy from the perspective of company and shareholders b A corporation decides to cut its dividend from 2 per share to 1 50 per share Give rationales theories to explain why this action may cause the stock price to increase c Bella owns 10,000 shares in Cinnamon Spice, which currently has 500,000 shares outstanding The stock sells for $86 on the open market Cinnamon Spice's management has decided on a two for one split (i) Will Bella's financial position change after the split, assuming that the stock's price will fall proportionately Based on your finding, explain why a firm's management would want to have a stock split (ii) Assuming only a 35 decrease in the stock price, what will be Bella's value after the split Based on your finding, what could have caused such reaction to stock price d An article on stock repurchases in the Los Angeles Times noted An increasing number of companies are finding that the best investment they can make these days is in themselves Discuss this view How is the desirability of repurchase affected by company prospects and the price of its stock

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 29, 2024

a. ABC Company had total earnings last year of 5,000,000, but expects total earnings to drop to 4,750,000 this year because of a slump in

a. ABC Company had total earnings last year of 5,000,000, but expects total earnings to drop to 4,750,000 this year because of a slump in the housing industry. There are currently 1,000,000 shares of common stock outstanding. The company has 4,000,000 worth of investments to undertake this year. The company finances 40% of its investments with debt and 60% with equity capital. The company paid 3.00 per share in dividends last year.

If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year? Discuss the pros and cons of this policy from the perspective of company and shareholders.

If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year? Discuss the pros and cons of this policy from the perspective of company and shareholders.
If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year? Discuss the pros and cons of this policy from the perspective of company and shareholders.

b. A corporation decides to cut its dividend from 2 per share to 1.50 per share. Give rationales/theories to explain why this action may cause the stock price to increase.

c. Bella owns 10,000 shares in Cinnamon Spice, which currently has 500,000 shares outstanding. The stock sells for $86 on the open market. Cinnamon Spice's management has decided on a two-for-one split.

(i) Will Bella's financial position change after the split, assuming that the stock's price will fall proportionately? Based on your finding, explain why a firm's management would want to have a stock split.

(ii) Assuming only a 35% decrease in the stock price, what will be Bella's value after the split? Based on your finding, what could have caused such reaction to stock price?

d. An article on stock repurchases in the Los Angeles Times noted An increasing number of companies are finding that the best investment they can make these days is in themselves. Discuss this view. How is the desirability of repurchase affected by company prospects and the price of its stock?