5.

The stock price is the total market value of equity divided by the shares outstanding, so:
P0 = $465,000 equity/12,000 shares = $38.75 per share
Ignoring tax effects, the stock price will drop by the amount of the dividend, so:
PX = $38.75 1.90 = $36.85
The total dividends paid will be:
$1.90 per share(12,000 shares) = $22,800
The equity and cash accounts will both decline by $22,800.

6.

Repurchasing the shares will reduce shareholders equity by $22,800. The shares repurchased will be
the total purchase amount divided by the stock price, so:
Shares bought = $22,800/$38.75 = 588
And the new shares outstanding will be:
New shares outstanding = 12,000 588 = 11,412
After repurchase, the new stock price is:
Share price = $442,200/11,412 shares = $38.75

The repurchase is effectively the same as the cash dividend because you either hold a share worth
$38.75 or a share worth $36.85 and $1.90 in cash. Therefore, you participate in the repurchase
according to the dividend payout percentage; you are unaffected.
7.

The stock price is the total market value of equity divided by the shares outstanding, so:
P0 = $655,000 equity/20,000 shares = $32.75 per share
The shares outstanding will increase by 25 percent, so:
New shares outstanding = 20,000(1.25) = 25,000
The new stock price is the market value of equity divided by the new shares outstanding, so:
PX = $655,000/25,000 shares = $26.20

8.

With a stock dividend, the shares outstanding will increase by one plus the dividend amount, so:
New shares outstanding = 410,000(1.15) = 471,500
The capital surplus is the capital paid in excess of par value, which is $1, so:
Capital surplus for new shares = 61,500($44) = $2,706,000
The new capital surplus will be the old capital surplus plus the additional capital surplus for the new
shares, so:
Capital surplus = $2,150,000 + 2,706,000 = $4,856,000
The new equity portion of the balance sheet will look like this:
Common stock ($1 par value)
Capital surplus
Retained earnings

5.

$ 471,500
4,856,000
2,552,500
$7,880,000
The stock price is the total market value of equity divided by the shares outstanding, so:
P0 = $465,000 equity/12,000 shares = $38.75 per share
Ignoring tax effects, the stock price will drop by the amount of the dividend, so:
PX = $38.75 1.90 = $36.85
The total dividends paid will be:
$1.90 per share(12,000 shares) = $22,800
The equity and cash accounts will both decline by $22,800.

6.

Repurchasing the shares will reduce shareholders equity by $22,800. The shares repurchased will be
the total purchase amount divided by the stock price, so:

Shares bought = $22,800/$38.75 = 588

And the new shares outstanding will be:
New shares outstanding = 12,000 588 = 11,412
After repurchase, the new stock price is:
Share price = $442,200/11,412 shares = $38.75
The repurchase is effectively the same as the cash dividend because you either hold a share worth
$38.75 or a share worth $36.85 and $1.90 in cash. Therefore, you participate in the repurchase
according to the dividend payout percentage; you are unaffected.
7.

The stock price is the total market value of equity divided by the shares outstanding, so:
P0 = $655,000 equity/20,000 shares = $32.75 per share
The shares outstanding will increase by 25 percent, so:
New shares outstanding = 20,000(1.25) = 25,000
The new stock price is the market value of equity divided by the new shares outstanding, so:
PX = $655,000/25,000 shares = $26.20

8.

With a stock dividend, the shares outstanding will increase by one plus the dividend amount, so:
New shares outstanding = 410,000(1.15) = 471,500
The capital surplus is the capital paid in excess of par value, which is $1, so:
Capital surplus for new shares = 61,500($44) = $2,706,000
The new capital surplus will be the old capital surplus plus the additional capital surplus for the new
shares, so:
Capital surplus = $2,150,000 + 2,706,000 = $4,856,000
The new equity portion of the balance sheet will look like this:
Common stock ($1 par value)
Capital surplus
Retained earnings

14. a.

$ 471,500
4,856,000
2,552,500
$7,880,000

Since the firm has a 100 percent payout policy, the entire net income, $85,000 will be paid as a
dividend. The current value of the firm is the discounted value one year from now, plus the
current income, which is:

Value = $85,000 + $1,725,000/1.12

Value = $1,625,178.57
b.

The current stock price is the value of the firm, divided by the shares outstanding, which is:
Stock price = $1,625,178.57/25,000
Stock price = $65.01
Since the company has a 100 percent payout policy, the current dividend per share will be the
companys net income, divided by the shares outstanding, or:
Current dividend = $85,000/25,000
Current dividend = $3.40
The stock price will fall by the value of the dividend to:
Ex-dividend stock price = $65.01 3.40
Ex-dividend stock price = $61.61