question archive 1) The Adams Corporation has earnings of $750,000, with 300,000 shares outstanding
1) The Adams Corporation has earnings of $750,000, with 300,000 shares outstanding
Subject:AccountingPrice:4.86 Bought12
1) The Adams Corporation has earnings of $750,000, with 300,000 shares outstanding. Its P/E ratio is 8. The firm is holding $400,000 of funds to invest or pay out in dividends. If the funds are retained, the aftertax return on investment will be 15 percent, and this will add to present earnings. The 15 percent is the normal return anticipated for the corporation, and the P/E ratio would remain unchanged. If the funds are paid out in the form of dividends, the P/E ratio will increase by 10 percent, because the shareholders in this corporation have a preference for dividends over retained earnings.
a. Compute the price of the stock under the two plans. (Do not round intermediate calculations. Round the final answers to 2 decimal places.)
Price of stock
Retention plan$
Payout plan$
2. Worst Buy Company has had a lot of complaints from customers of late and its stock price is now only $2 per share. It plans to employ a one?for?five reverse stock split to increase the share value. Assume Dean Smith owns 140 shares.
a. How many shares will he own after the reverse stock split?
Number of shares shares
b. What is the anticipated share price after the reverse stock split?
Anticipated stock price $
c. Because investors often have a negative reaction to reverse stock splits, assume the shares only go up to 80 percent of the value computed in part b. What will the share price be?
Share price $
d. How has the value of Dean Smith's holdings changed from before the reverse stock split to after the reverse stock split (based on the share value computed in part c)? (Input the answer as positive value.)
Dean Smith's holdings have decreased by $
3. Peabody Mining Company's common stock is selling for $50.00 the day before the stock goes ex-dividend. The annual dividend yield is 5.6 percent, and dividends are distributed quarterly. (Do not round intermediate calculations. Round the final answers to 2 decimal places.)
Based solely on the impact of the cash dividend, by how much should the stock go down on the ex-dividend date?
Cash dividend $
Ignoring taxes, what is the suggested new price of the stock?
New price $
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1.a. Stock price:
Retention plan = $21.6
Pay-out plan = $22
2.a. Shares = 28,
b. Anticipated price = $10/share,
c. Share price = $8/share,
d. Change = Value decreased by $56
3.Quarterly dividend = $0.70,
New price = $49.30
Step-by-step explanation
1.a. Stock price computation:
Under retention plan:
Retaining profit results in increased earnings as there is 15% return on reinvestment:
Return = Retained amount * ROI
= $400,000 *15%
= $60,000
Therefore, Total earnings = Current earning + Return
= $750,000 + $60,000
= $810,000
Now, Stock price:
P/E ratio = Stock price / EPS
Stock price = P/E ratio * EPS
= 8 * ($810,000 / 300,000)
= $21.6
Under Payout plan:
Pay-out plans increase P/E by 10%
P/E = 8 * (1+10%)
= 8.8
Stock price = P/E ratio * EPS
= 8.8 * ($750,000/300,000)
= $22
2.a. Shares = Pre-split shares * Split ratio
= 140 * (1/5)
= 28
b. Shares price = Pre-split price* (1/Split ratio)
= $2 * (1/(1/5))
= $10/share
c. Share price = Adjustment ratio * Share price after split
= 0.80 * $10
= $8/share
d. Pre-split price = Pre-split shares * Pre-split price
= 140 * $2
= $280
Post split price = Post-split shares * Share price
= 28 * $8
= $224
Change = Post split price - Pre-split price
= $224 - $280
= - $56
The value decreased by $56
3.Cash dividend (Quarterly) = Share price * (Dividend yield/4)
= $50 * (5.6%/4)
= $0.70
New share price = Current price - Dividend (Quarterly)
= $50 - $0.70
= $49.30
