QUESTION 3 - DIVIDEND POLICY Delicious Ice Cream Manufacturing Company Limited, a manufacturer of homemade ice-cream, has preferred stock of $50,000, paid-in capital of $80,000, and retained earnings of $60,000 (including the current year's earnings). The company has 60,000 shares of common stock outstanding. This year, 2018, the company's earnings available to common stockholders are $12,000. (PLEASE CONTINUE TO THE NEXT PAGE) 3 2020 Semester II FINC 310 Delicious Ice Cream Company Limited has a stock price of $60 per share and is considering a 3-for-1 stock split. Answer the following questions: i. How many outstanding shares will Delicious Ice-Cream Limited have after the stock split? (2 marks) What change in stock price may result from the stock split? Please provide brief explanation to support your answer (2 marks) iii. Provide a brief description of the following terms: 1. Residual dividend policy (3 marks) 2. Legal capital (2 marks) Entrepernah iv. What is the maximum cash dividend per share that Delicious can pay on common stock BEFORE AFTER the stock split? (Assume that legal capital ONLY includes all paid-in capital) (5 marks) v. Explain the differences between cash dividend and stock split. (2 marks) vi. Identify ONE constraint that may encourage Delicious Company to choose a stock split over a cash dividend? (3 marks) QUESTION 3 - DIVIDEND POLICY Delicious Ice Cream Manufacturing Company Limited, a manufacturer of homemade ice-cream, has preferred stock of $50,000, paid-in capital of $80,000, and retained earnings of $60,000 (including the current year's earnings). The company has 60,000 shares of common stock outstanding. This year, 2018, the company's earnings available to common stockholders are $12,000. (PLEASE CONTINUE TO THE NEXT PAGE) 3 2020 Semester II FINC 310 Delicious Ice Cream Company Limited has a stock price of $60 per share and is considering a 3-for-1 stock split. Answer the following questions: i. How many outstanding shares will Delicious Ice-Cream Limited have after the stock split? (2 marks) What change in stock price may result from the stock split? Please provide brief explanation to support your answer (2 marks) iii. Provide a brief description of the following terms: 1. Residual dividend policy (3 marks) 2. Legal capital (2 marks) Entrepernah iv. What is the maximum cash dividend per share that Delicious can pay on common stock BEFORE AFTER the stock split? (Assume that legal capital ONLY includes all paid-in capital) (5 marks) v. Explain the differences between cash dividend and stock split. (2 marks) vi. Identify ONE constraint that may encourage Delicious Company to choose a stock split over a cash dividend
