12:39 Document (1) (7) م tl 48% TOPIC 4: DIVIDEND POLICY Question 1 i. Explain the differences between stock split and stock dividends. What legal constraints might encourage a firm to choose a stock split over a stock dividend? Question 2 FUSTA Company Limited has a dividend reinvestment programme for shareholders. At the end of 2017 you agreed to participate fully in FUSTA Company's DRIPS programme. At that time, you had 100 shares of stock with a market price per share of $46. The share prices and dividends paid over the past four years are shown in the table on the next page. TABLE 4 Share Price After Dividend per Year Dividend Share 2018 $50.75 $2.75 2019 $55.15 $3.00 2020 $60.50 $3.50 2021 $61.25 $4.00 Answer the following questions: a) At the end of 2021 how many shares of stock would you have in FUSTA Company Limited b) What will be the total value of your shares in FUSTA Company Limited at the end of 2018? Question 3 You currently own (the number of shares obtained in question 2 above) of FUSTA Company Limited shares. When compared to similar companies FUSTA Company Limited has a highpayout dividend policy, and is expected to pay $4.50 cash dividend on its shares which has a market price of $61.50. You want a low dividend policy of 2% of the stock price. What will you need to do to convert this high-dividend policy to a low-dividend policy. Assume no taxes exist. I Print Layout Headings Edit Share ||| A Read Aloud

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter12: Valuation: Cash-flow Based Approaches

Section: Chapter Questions

Problem 1FIC

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With the answers to questions 2 provided below please answer question 3 Answer the following questions: a) At the end of 2021 how many shares of stock would you have in FUSTA Company Limited b) What will be the total value of your shares in FUSTA Company Limited at the end of 2021? Number of Shares We Have in 2018 = 100 shares Dividend to Receive in 2018 = Number of Shares You Have x Dividend Per Share Dividend to Receive in 2018 = 100 shares x $2.75 = $275 Number of Shares That Can Be Purchased =Total Dividend Received / Market Price Of Share(aka SharePrice) Number of Shares That Can Be Purchased = $275 / $50.75 = 5.4187 shares Number of Shares You Have 2019 = 100 + 5.4187 = 105.4187 shares Dividend to Receive in 2019 = Number of Shares You Have x Dividend Per Share Dividend to Receive in 2019 = 105.4187 x $3.00 = $316.26 Number of Shares That Can Be Purchased = $316.26 / $55.15 = 5.7345 shares Number of Shares You Have 2020 = 105.4187 + 5.7345 = 111.1532 shares Dividend to Receive in 2020 = Number of Shares You Have x Dividend Per Share Dividend to Receive in 2020 = 111.15 x $3.50 = $389.04 Number of Shares That Can Be Purchased = $389.04 / $60.50 = 6.4304 shares Number of Shares You Have 2021 = 111.15 + 6.43 = 117.58 shares Dividend to Receive in 2021 = Number of Shares You Have x Dividend Per Share Dividend to Receive in 2021 = 117.58 x $4.00 = $470.32 Number of Shares That Can Be Purchased = 470.32 / $61.25 = 7.679 shares Number of Shares you will have at the end of 2021 is: = 117.58 + 7.679 = 125.259 shares The total value of these shares in FUSTA Company Limited at the end of 2021 = 125.259 x $61.25 = $7,672.11