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Dividend Policy Question and Answer

1. Corporate value is the intrinsic value of a company, while market value is the price of the company's shares on the stock market. 2. If corporate value is greater than market value, the company is said to be undervalued. If corporate value is less than market value, the company is overvalued. 3. The document provides calculations and examples of how to determine a company's corporate value based on factors like dividends, growth rates, costs of debt and equity, and compares it to the market value.

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375 views7 pages

Dividend Policy Question and Answer

1. Corporate value is the intrinsic value of a company, while market value is the price of the company's shares on the stock market. 2. If corporate value is greater than market value, the company is said to be undervalued. If corporate value is less than market value, the company is overvalued. 3. The document provides calculations and examples of how to determine a company's corporate value based on factors like dividends, growth rates, costs of debt and equity, and compares it to the market value.

Uploaded by

Bella Cynthia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Corporate Value > Market Value = Undervalue

Corporate Value < Market Value = Overvalue

a. Value of Equity = Dividend year 0 + Dividend Year 1 /


200.000 + 1.200.000 / (1+10%)
$ 1,290,909
a. After tax costs of debt = Kd x (1-Tax)
= 8% x (1-34%) b. Value of Equity = Dividend year 0 + Dividend Year 1 /
5.28% 600.000 + (1.200.000-440.000) /(1+10%)
$ 1,290,909
b. Dividend = 2.05 Kcs = D1 / Pcs + g The new shares = 400.000
Growth = 5% per year Kcs = 2.05 x ( 1+ 5%) / 25 + 5%
Price stock = $25 = 13.61% Raise CS 400.000 x (1+ 10%)
440000
c.
Face value 1000 = Rate(nper, pmt, pv, fv)
Coupon rate 12% nper = years = 20
Current price 1150 pmt = 120 (1000x12%)
Years 20 pv = current price = -1150
Tax rate 34% fv = face value = 1000
PMT 120

Rate formula 10.21% >> YTM (Kd)

After tax cost of debt = Kd x (1-Tax)


= 10.21% (1-34%)
6.74%

d. Dividend Ps = 100
Percentage 7%
Current price 85

Kps = Div ps / P ps
Kps = 100 x 7% / 85
Kps = 8.24%
Net Profit 15,320,000
Dividend 3,800,000
Forecast Net Profit 38,560,000
d year 0 + Dividend Year 1 / (1+Ke)
000 / (1+10%) Payout ratio Dividends/ Net Income
Dividend = Net Income x Payout Ratio

d year 0 + Dividend Year 1 / (1+Ke) Payout ratio (2016) 3,800,000


000-440.000) /(1+10%) 15,320,000 24.80%

Dividends 38.560.000 x 24.80%


9,564,491
What do you think the ex-dividend-date price of the company's shares will be?
Stock price = PV of next dividend + PV of all future dividend
$120 = $40 + PV of all future dividend
PV of all future dividend = 120 - 40 = $ 80

If the firm management is right about the stimulating effect of disgorging cash,
do you think that the drop in stock price after the ex-dividend date will be smaller than
otherwise expected? Why or why not?

1. The underlying motivation for the large payout, it is possible that the stock price would
not fall by $40.
2. The firms had just admitted that its growth days are over, thus the price will probably
fall by more than $40.

Kingwood Corporation is considering paying a one time $40 dividend. Its current price is
$120. We would expect, all else equal, for the firm's stock price to fall by $40 to $80 once
the dividend's ex date passes.
a. Dividend = $1.50 x 5000 shares $ 7,500 Equity 7,500
Cash 7,500
Equity berkurang 7500 ; Cash berkurang 7,500

Cash 10500 Account payable 22000


AR 22000 Notes Payable 5000
Inventories 30000 Current liabilities 27000
Current assets 62500 Long term debt 33000
Fixed assets 130000 Equity 132500
Total assets 192500 Total Liabilites & Capita 192500

b. The effect after payment of the cash dividend the firm value has fallen by the amount of the dividend
($7500). If this were interpreted as a market value balance sheet, there would be no difference. The
firm would still have $7500 less in cash. Since the value of each share of stock would have fallen by $1.50
after the dividend payment, the total market value of stock held would still fall by $7.500.
a. Times interest earned ratio = Net operating income / Interest expense
2016
Times interest earned ratio = 11.774.000 / 919.000 12.81175

2015 a. Debt ratio =


Times interest earned ratio = 10.469.000 / 830.000 12.61325 Interest bearing debt ratio

2014 Debt ratio


Times interest earned ratio = 9.166.000 / 711.000 12.8917

b. In 2016, Home Depot earned enough operating income to pay its interest charges 12.81 times. Total assets = Total Liabiliti
The comparable values for 2015 and 2014 are 12.61 and 12.89 times. While each of these
values suggests that Home Depot is able to pay its debt obligation comfortably. Interest bearing debt ratio
In 2014, having more obligation and less operating income is not a recipe of success.

b. Debt - to - enterprise - v
a. Debt ratio = Total Liabilities / Total Assets
Interest bearing debt ratio = Interest-bearing debt / Total assets

13,997,000
46.51%
30,095,000

Total assets = Total Liabilities + Total Equity = (7.751.000+ 6.246.00) + 16.098.000 --> 30.095.000

Interest bearing debt ratio = 6,246,000


20.75%
30,095,000

b. Debt - to - enterprise - value ratio = Total Book Value of Interest - Bearing Debt
Book Value of Interest Bearing Debt + Market Value of Equity
6,246,000
6,246,000 + 3,586,000
63.53%
CORPORATION VALUE = FIRM VALUE (PAGE 522)

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