Reference no: EM132613886
(a) As an investor you have the collected the following information on five firms in order to assess their dividend policies: In millions of dollars (figures in parentheses are negative).
Company Free Cash Flow to Equity Dividends Paid Return on Equity Beta
Yellow $ 55 $ 35 8% 0.80 Blue $ 60 $ 12 14.5% 1.30 Green $($ 15) $ 5 4.0% 1.25 Brown $ 20 $ 12 1.5 % 0.90 Grey ($ 5) $ 8 14% 1.05
The average risk-free rate during the period was 7% and the average return on the market was 12%.
(i) Which of these firms you would pressure to pay more in dividends and why?
(ii) Which of the firms would you encourage to pay less in dividends and why?
(b) What do record date, ex-dividend date, and payment date mean with regard to dividends?
(c) Upton Limited has the same market value as the book value of its balance sheet accounts. The firm has declared a dividend of $0.35 per share that will be paid in two days' time. The company has 8,000 shares of stock outstanding trading in the market. The balance sheet has Cash 25,000 Equity 310,000 Fixed Assets 285,000.
(i) Ignoring taxes, what is the stock selling for today?
(ii) What will it sell in two days' time after the ex-dividend date?
(iii) What are the accounts affected after the dividends are paid and what will be their new balance?
(d) Two investors, Mary and Matthew have cash flow preferences that differ from the dividend payments declared by the companies they have invested in.
(i) Mary is an investor in Gamma and own 100 shares. Gamma shares sell for $41. The company is about to pay a $1 dividend per share, but Mary prefers a $2 dividend per share this year. What can Mary do to receive the desired cash amount of $200?
(ii) Matthew is an investor in Delta and own 200 shares. Delta shares sell for $24. The company is about to pay a $4 dividend per share, but Matthew prefers to receive a lower dividend of $2 per share this year and a higher dividend in future. What can Matthew do to receive his desired cash amount of only $400?