Corporate Finance
Questions and Practice problems_Chapter 19
Chapter 19:
Concept questions (page 614 textbook): 4, 7, 9, 19, 20
Questions and Problems (page 616 textbook): 1, 3, 4, 5, 6, 7
Answers:
Concept questions:
4. Friday, December 29 is the ex-dividend day. Remember not to count January 1 because it is
a holiday, and the exchanges are closed. Anyone who buys the stock before December 29 is
entitled to the dividend, assuming they do not sell it again before December 29.
7. The stock price dropped because of an expected drop in future dividends. Since the stock
price is the present value of all future dividend payments, if the expected future dividend
payments decrease, then the stock price will decline.
9. If these firms just went public, they probably did so because they were growing and needed
the additional capital. Growth firms typically pay very small cash dividends, if they pay a
dividend at all. This is because they have numerous projects available, and they reinvest the
earnings in the firm instead of paying cash dividends.
19. Unless there is an unsatisfied high dividend clientele, a firm cannot improve its share price
by switching policies. If the market is in equilibrium, the number of people who desire high
dividend payout stocks should exactly equal the number of such stocks available. The
supplies and demands of each clientele will be exactly met in equilibrium. If the market is
not in equilibrium, the supply of high dividend payout stocks may be less than the demand.
Only in such a situation could a firm benefit from a policy shift.
20. This finding implies that firms use initial dividends to “signal” their potential growth and
positive NPV prospects to the stock market. The initiation of regular cash dividends also
serves to convince the market that their high current earnings are not temporary.
Questions and Problems:
1. After-tax dividend = $9.50(1 – .15) = $8.08
The stock price should drop by the after-tax dividend amount, or:
Ex-dividend price = $106.93
3. a. To find the new shares outstanding, we multiply the current shares outstanding times
the ratio of new shares to old shares, so:
New shares outstanding = 30,000(4/1) = 120,000
The equity accounts are unchanged except that the par value of the stock is changed by
the ratio of new shares to old shares, so the new par value is:
New par value = $1(1/4) = $0.25 per share.
