Question

1.In terms of changes in the number of shares outstanding, a 20% stock dividend is equivalent to a ____________ stock split.

Select one:

a. six for five

b. six for four

c. five for three

d. five for four

e. seven for six

2. PQR Inc. has a debt-equity ratio of 1.6 and 1 million shares outstanding. The firm’s pro-forma Statement of Comprehensive income for the next year indicates that its net income will be $560,000. If the company proposes to invest 60% of its earnings in projects, what is the dividend per share?

Select one:

a. $0.34

b. $0.43

c. $0.56

d. $0.90

e. $1.46

3. STU Mobility Inc. will pay $3 per share in cash dividends one year from now, and a liquidating dividend of $75 per share two years from now. The required return on similar common stocks is 12%. If you own 1,000 shares of the 100,000 total shares outstanding in STU, but you want to have constant dividend payout in the next two years, how much homemade dividends can you get in each year?

Select one:

a. $3,696.23

b. $31,234.06

c. $31,302.33

d. $36,962.26

e. $62,468.11

Answer 1

1. Method 1: 20% stock dividend means that if you are holding 100 shares you will get 20 bonus shares and hence the total share will become 120.

6 for 5 split means that 5 shares will be converted to 6 shares or in other words, 100 (5*20) will be converted to 120 (6*20) shares.

Method 2: We can also divide the split ratio i.e., 6 for 5 split means 6/5 = 1.2 times increment or 20% increment. Hence the correct answer is Option a - six for five.

In terms of changes in the number of shares outstanding, a 20% stock dividend is equivalent to a six for five stock split.