When setting dividend policy, a firm should pay dividends that adjust annually i

Question

When setting dividend policy, a firm should pay dividends that adjust annually in response to changes in the firm's earnings. Kelso's is paying a dividend of $2.20 a share this quarter. The stock closed at $57.70 a share today. What will the ex-dividend stock price be if the tax rate is 15%? Greenwood Hotels has no debt and 9,000 shares of stock outstanding. The new CFO is considering issuing $80,000 of debt and using the proceeds to retire 1,500 shares of stock. The coupon rate on the debt is 7.5%. What is the break-even level of earnings before interest and taxes between the levered and unlevered? Underpricing in the IPO market tends to discourage investors from participating because underpriced shares tend to be under subscribed.

Explanation / Answer

Q 11. It is true that divident policy follows the earning of the year and the dividend payout should be adjusted to the earning level of the year. The statement is true. Q 12. Market Price before dividend=          57.70 Dividend =(post Tax)               1.9 Price ex dividend= $      55.83 Q13. Assume x is the break even EBIT Initial no of shares                    9,000 Shares after debt issue                    7,500 Amount of debt                  80,000 Interest rate 7.5% Interest amount                    6,000 Assuming no tax Now EPS before debt = x/9000 EPS after debt =   (x-6000)/7500 at break even levered and unlevered x/9000=(x-6000)/7500 7500x=9000x-54000000 x= 54000000/1500=                  36,000 So Break even EBIT for levered & unlevered $                                36,000.00 Q.14. The underpriced shares are generally oversubscribed , so the statement that underpriced shares discourage investors in FALSE.

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