Question

Mike Trout is an analyst in the research department of an international securities firm. Mike is currently analyzing Hildy Products, a publicly traded global consumer goods company located in the United States. Selected data for Hildy are presented in Exhibit 1

EXHIBIT 1 SELECTED FINANCIAL DATA FOR HILDY PRODUCTS

Most Recent Fiscal Year:

Pretax income- $280 million

Net Income after tax -$182 million

Cash flow from operations- $235 million

Capital expenditures- $175 million

Earnings per share- $1.82

Current:

Shares outstanding- 100 million

Book value per share- $25.60

Share price- $20.00

Hildy currently does not pay a dividend, and the company operates with a target capital structure of 40% debt and 60% equity. However, on a recent conference call, Hildy's management indicated that they are considering four payout proposals:

• Proposal #1: Issue a 10% stock dividend.

The implementation of Proposal #1 would generally lead to shareholders:

A. having to pay tax on the dividend received

B. experiencing a decrease int eh total cost basis of their shares

C. having the same proportionate ownership as before implementation

*show work for answer

Answer 1

10% stock dividend means 10 million shares given as dividend.

Therefore total worth = 10 million shares * $20 = $200 million

This has to be financed by net income or retained earnings.

The answer is C. Say a person had 10 shares and after the stock dividend he will have 11 shares. Earlier his ownership was 10/100 = 10%. Now his ownership is 11/110 ie 10%.

Stock dividend doesn't reduce any cost basis. Since the dividend is issued in the form of shares, the tax won't have to be paid unless you sell those shares.