What are stock splits and stock dividends

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Reference no: EM132266531

Integrated Waveguide Technologies Inc. (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit meta material plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT’s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smithfield have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy.

Your new boss at the consulting firm Flick and Associates, which has been retained to help IWT prepare for its public offering, has asked you to make a presentation to Jackson and Smithfield in which you review the theory of dividend policy and discuss the following issues.

A. Assume that IWT has completed its IPO and has a $100million capital budget planned for the coming year. You have determined that its present capital structure (82% equity and 18% debt) is optimal, and its net income is forecasted at $140million. Use the residual distribution approach to determine IWT’s total dollar distribution. (Graph if possible)

B. Assume for now that the distribution is in the form of a dividend. Suppose IWT has 100 million shares of stock outstanding. What is the forecasted dividend payout ratio? What is the forecasted dividend per share? What would happen to the payout ratio and DPS if net income were forecasted to decrease by 25%? To increase by 15%? In general terms, how would a change in investment opportunities affect the payout ratio under the residual distribution policy? (Graph if possible)

C. Suppose IWT has decided to distribute $55 million, which it presently is holding in liquid short- term investments. IWT’s value of operations is estimated to be about $1,997.5 million, and it has $360 million in debt (it has no preferred stock). As mentioned previously, IWT has 100 million shares of stock outstanding.

D. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? (please show work)

E. Now suppose that IWT has just made the $55 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? (please show work)

F. Suppose instead that IWT has just made the $55 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase? (please show work)

G. What are stock splits and stock dividends? What are the advantages and disadvantages of each?

H. What is a dividend reinvestment plan (DRIP), and how does it work?

Reference no: EM132266531

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