FIN 516 Week 1 Homework
Week 1 Homework Residual Distribution Model: Given the following information: $5 Million in capital expenditures Capital structure 60% debt 40% equity. If net income next year is $3 million and Puckett follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio? In order to find out the dividend payout (distribution) ratio, I must first find out what the distribution is. Formula: Distribution = Net Income – [(equity) (Capital Expenditures)] Net income = $3 mil Equity = 40% Capital expenditures = $5 mil 3 – [(.40) (5)] 3 – 2 = 1 Formula: Distribution Ratio = Distribution / Net Income 1 / 3 = 33.33% (Brigham, 2017 p.579) 14-7 Stock Split Given the following information: Own 2000 common shares of Laurence Inc. EPS (Earnings Per Share) is $10 DPS (Dividends per share) is $3 Stock sells for $80 per share Announced 2 for 1 split Immediately after the split: how many shares will you have, what will the adjusted EPS and DPS be, and what would you expect the stock price to be? Because there was a 2 for 1 split and I already have 2000 common shares, I will now have 4000 shares. With this 2 for 1 split, the EPS and DPS would be half of its amount per our reading material which says, “… if the price of Porter’s stock rose to $80, management would probably declare a 2 for 1 stock split, thus doubling the number of shares outstanding, halving the earnings, dividends, and free cash flow per share, and thereby lowering the stock price.” (Brigham, 2017 p. 595-6). Therefore the EPS would be $5 and the DPS would be $1.50. The expected stock price would be $40 per share. Now this is really the same amount as the 2000 shares at $80. But the differ
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