# Dividend Policy

Submitted By ashifrahman2011
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Chapter 13
Dividend Policy
Solutions to Problems
P13-1. LG 1: Dividend Payment Procedures Basic (a) Retained earnings (Dr.) Dividends payable (Cr.) (b) Ex dividend date is Thursday, July 6. (c) Cash \$170,000 Dividends payable Retained earnings \$0 \$2,170,000 Debit \$330,000 \$330,000 Credit

(d) The dividend payment will result in a decrease in total assets equal to the amount of the payment. (e) Notwithstanding general market fluctuations, the stock price would be expected to drop by the amount of the declared dividend on the ex dividend date. P13-2. LG 1: Dividend Payment Intermediate (a) (b) (c) (d) Friday, May 7 Monday, May 10 The price of the stock should drop by the amount of the dividend (\$0.80). She would be better off buying the stock at \$35 and taking the dividend. Her \$0.80 dividend would be taxed as the maximum rate of 15 percent and her \$4 short-term capital gain would be taxed at you ordinary marginal tax rate, which is probably higher than the 15 percent. If she bought the stock post dividend for \$34.20 she would pay her marginal ordinary tax rate on the full \$4.80 of short-term capital gains.

P13-3. LG 2: Residual Dividend Policy Intermediate (a) Residual dividend policy means that the firm will consider its investment opportunities first. If after meeting these requirements there are funds left, the firm will pay the residual out in the form of dividends. Thus, if the firm has excellent investment opportunities, the dividend will be smaller than if investment opportunities are limited. (b) Proposed Capital budget Debt portion \$2,000,000 800,000 \$3,000,000 1,200,000 \$4,000,000 1,600,000

336

Part 4 Long-Term Financial Decisions

Equity portion Available retained earnings Dividend Dividend payout ratio

1,200,000 \$2,000,000 800,000 40%

1,800,000 \$2,000,000 200,000 10%

2,400,000 \$2,000,000 0 0%

(c) The amount of dividends paid is...

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