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Skill Problem Sets – Complete the four problems to practice your skill at calculating stock splits and repurchases and illustrate your answers.

1.     1.  Residual Dividend Model – Axel telecommunications has a target capital structure that consists of 70% debt and 30% equity.  The company anticipates that its capital budget for the upcoming year will be $3,000,000.  If axel reports net income of $2,000,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?


2.       2    Stock Split – Gamma Medical’s stock trades at $90 a share.  The company is contemplating a 3 for 2 split.  Assuming that the stock split will have no effect on the market value of its equity, what will be the company’s stock price following the stock split?


3.       3.  Stock Repurchases – Beta Industries has net income of $2,000,000, and it has 1,000,000 shares of common stock outstanding.  The company’s stock currently trades at $32 a share.  Beta is considering a plan in which it will use available cash to repurchase 20% of its shares in the open market.  The repurchase is expected to have no effect on new income or the company’s P/E ratio.  What will be Beta’s stock price following the stock repurchase?



4.       4.  Stock Split – After a 5-for-1 stock split, Strasburg Company paid a dividend of $0.;75 per new share, which represents a 9% increase over last year’s pre-split dividend.  What was last year’s dividend per share?

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