Question

1/ Buggy Whip Manufacturing Company is issuing preferred stock yielding 16%. Selten Corporation is considering buying the stock. Buggy's tax rate is 0% due to continuing heavy tax losses, and Selten's tax rate is 33%. What is the after-tax preferred yield for Selten? (Round your answer to 2 decimal places.)

12.92

16.52

15.57

14.42

2/ Lucas, Inc. earned $20 million last year and retained $5 million. Lucas has 6 million shares outstanding, and the current price of Lucas shares is $25 per share. What is the payout ratio? (Round your answer to the nearest whole percent.)

70%

80%

78%

75%

3/ CBA Inc has 220,000 shares outstanding with a $5.5 par value. The shares were issued for $15.5. The stock is currently selling for $27.5. CBA has $6,000,000 in retained earnings and has declared a stock dividend that will increase the number of outstanding shares by 6.50%. What will be the capital in excess of par account after the stock dividend?

$2,514,600

$2,200,000

$8,514,600

$4,711,350

Answer 1

Solution 1:

As per taxation provision 70% of preferred dividend is tax exempt in the hand of receiver.

Therefore After Tax Preferred Yield = Before Tax Preferred Stock Yield*[1-(Tax Rate)*(.30)]

=0.16 * [1-(0.33*0.30)]

= 14.42%

Hence last option is correct.

Solution 2:

Total earnings = $20 million

Earning retained = $5 million

Earnings payout = $15 million

Payout ratio = $15 million / $20 million = 75%

Hence last option is correct.

Solution 3:

Existing capital in excess of par = 220000 * ($15.5 - $5.5) =$2,200,000

Nos of shares in stock dividend = 220000 * 6.50% = 14300 shares

Current market price = $27.50

Aditiaon capital in excess par from stock dividend = 14300 * ($27.50 - $5.50) = $314,600

Balance of capital in excess of part account after stock dividend = $2,200,000 +$314,600

= $2,514,600

Hence first option is correct.