Stock split versus stock dividend: Firm Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders' equity position shown. The current stock price is $\$ 120$ per share. The most recent period's earnings available for common stock are included in retained earnings.

Preferred stock	$1,000,000
Common stock (100,000 shares at$3 par)	300,000
Paid-in capital in excess of par	1,700,000
Retained earnings	10,000,000
quad Total stockholders' equity	$13,000,000

b. What change in stock price would you expect to result from the stock split?

Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills $450,000 for sales and has$345,000 in variable costs. The change in credit terms is expected to increase sales to $510,000. Bad-debt expenses will increase from 1% to 1.5% of sales. The firm has a required rate of return on equal-risk investments of 20%. (Note: Assume a 365-day year.)

d. Do you recommend this change in credit terms? Why or why not?

Alternative dividend policies Over the last 10 years, a firm has had the earnings per share shown in the following table.

a. If the firm's dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what would be the annual dividend for each year?

Dividend payment procedures At the quarterly dividend meeting, Wood Shoes declared a cash dividend of $\$ 1.10$ per share for holders of record on Monday, July 10. The firm has 300,000 shares of common stock outstanding and has set a payment date of July 31. Prior to the dividend declaration, the firm's key accounts were as follows:

Cash

$$\begin{array}{lllr} \$ 500,000 & \text { Dividends payable } & \$ & 0 \\ & \text { Retained earnings } & 2,500,000 \end{array}$$

c. What values would the key accounts have after the July 31 payment date?

Cash versus stock dividend Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share.

a. Show the effects on the firm of a cash dividend of $0.01,$0.05, $0.10, and$0.20, per share.

Stock dividend versus stock split: Firm The board of Wicker Home Health Care, Inc., is exploring ways to expand the number of shares outstanding in an effort to reduce the market price per share to a level that the firm considers more appealing to investors. The options under consideration are a $20 \%$ stock dividend and, alternatively, a 5 -for-4 stock split. At the present time, the firm's equity account and other per-share information are as follows:

a. Show the effect on the equity accounts and per-share data of a 20% stock dividend.

On October 1, Little Bobby Corporation’s stockholders’ equity is as follows.

$$\begin{array}{lc} \text{Common stock, \$5 par value}&\$400,000\\ \text{Paid-in capital in excess of par- common stock}&25,000\\ \text{Retained earnings}&\underline{155,000}\\ \text{Total stockholders' equity}&\underline{\underline{\$580,000}} \end{array}$$

On October 1, Little Bobby declares and distributes a 10% stock dividend when the market price of the stock is $15 per share.

Instructions (a) Compute the par value per share (1) before the stock dividend and (2) after the stock dividend.

Stock splits Nathan Detroit owns 400 shares of the food company General Mills, Inc., which he purchased during the recession in January 2009 for $35 per share. General Mills is regarded as a relatively safe company because it provides a basic product that consumers need in good and bad economic times. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 2-for-1. In June 2010, just before the stock split, General Mills shares were trading for$75.14.

Answer the following questions about the impact of the stock split on his holdings and taxes. Nathan is in the 28% federal income tax bracket.

e. What is Nathan’s tax liability from the event?

Degree of financial leverage Northwestern Savings and Loan has a current capital structure consisting of $250,000 of 16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%. a. Using EBIT values of$80,000 and $120,000, determine the associated earnings per share (EPS).

Stock splits Nathan Detroit owns 400 shares of the food company General Mills, Inc., which he purchased during the recession in January 2009 for $35 per share. General Mills is regarded as a relatively safe company because it provides a basic product that consumers need in good and bad economic times. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 2-for-1. In June 2010, just before the stock split, General Mills shares were trading for$75.14.

Answer the following questions about the impact of the stock split on his holdings and taxes. Nathan is in the 28% federal income tax bracket.

d. Does Nathan experience a gain or loss on the stock as a result of the 2-for-1 split?

Stock splits Nathan Detroit owns 400 shares of the food company General Mills, Inc., which he purchased during the recession in January 2009 for $35 per share. General Mills is regarded as a relatively safe company because it provides a basic product that consumers need in good and bad economic times. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 2-for-1. In June 2010, just before the stock split, General Mills shares were trading for$75.14.

Answer the following questions about the impact of the stock split on his holdings and taxes. Nathan is in the 28% federal income tax bracket.

c. Compare the total value of Nathan’s stock holdings before and after the split, given that the price of General Mills stock immediately after the split was $37.50. What do you find?

Stock split: Firm Growth Industries' current stockholders' equity account is as follows:

$$\begin{array}{lr} \text { Preferred stock } & \$ 400,000 \\ \text { Common stock }(600,000 \text { shares at } \$ 3 \text { par) } & 1,800,000 \\ \text { Paid-in capital in excess of par } & 200,000 \\ \text { Retained earnings } & {\underline{800,000}} \\ \text { Total stockholders' equity } & {\$ 3,200,000} \end{array}$$

e. Indicate the change, if any, expected if the firm declares a 1-for-4 reverse stock split.

Stock splits Nathan Detroit owns 400 shares of the food company General Mills, Inc., which he purchased during the recession in January 2009 for $35 per share. General Mills is regarded as a relatively safe company because it provides a basic product that consumers need in good and bad economic times. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 2-for-1. In June 2010, just before the stock split, General Mills shares were trading for$75.14.

Answer the following questions about the impact of the stock split on his holdings and taxes. Nathan is in the 28% federal income tax bracket.

b. Immediately after the split, what do you expect the value of General Mills to be?

Stock split: Firm Growth Industries' current stockholders' equity account is as follows:

$$\begin{array}{lr} \text { Preferred stock } & \$ 400,000 \\ \text { Common stock }(600,000 \text { shares at } \$ 3 \text { par) } & 1,800,000 \\ \text { Paid-in capital in excess of par } & 200,000 \\ \text { Retained earnings } & {\underline{800,000}} \\ \text { Total stockholders' equity } & {\$ 3,200,000} \end{array}$$

d. Indicate the change, if any, expected if the firm declares a 6-for-1 stock split.