Case Study

LOJERO, PRINCESS GLAIDINE C.
COA BLK 2G
FINANCIAL MANAGEMENT (AE 108)
Case 1:
A firm has had the indicated earnings per share over the last three years:
Year EPS
2020 45
2019 30
2018 15
1. If the firm’s dividend policy was based on a constant payout ratio of 40 percent, determine the
annual dividend for each year. (2 points)
Annual Dividend
Year EPS Ratio
(EPS*Ratio)
2020 45 40% 18
2019 30 40% 12
2018 15 40% 6
2. If the firm’s dividend policy was based on a fixed dollar payout policy of 50 cents per share plus an
extra dividend equal to 75 percent of earnings per share above P15.00, determine the annual dividend
for each year. (3 points)
Annual Dividend
Year EPS % (EPS*% less
10.75)
2020 45 75% **10.75 23
2019 30 75% **10.75 11.75
2018 15 75% **10.75 0.5
**(P15.00*75%) less P0.50 = P10.75
Case 2:
DCM has a stockholders’ equity account as shown below. The firm’s common stock currently sells for
P25 per share.
Preferred stock 625,000
Common stock (2,000,000 shares @ P1 par) 2,000,000
Paid-in-capital in excess of par 12,500,000

Retained earnings 14,500,000
Total stockholders’ equity 29,625,000
3. What is the maximum dividend per share DCM can pay? (Assume capital includes all paid-in
capital.) (2 points)
Dividend per Share = 14,500,000 Retained Earnings / 2,000,000 Share of Common Stock
= P7.25/share
4. Prepare a partial balance sheet (the stockholders’ equity accounts) to show independently
A. a 2 for 1 stock split of the common stock. (2 points)
Number of Shares (2,000,000/1)*2 P4,000,000
Multiply by: Par Value (2,000,000/4,000,000) 0.50
Total Common Stock after 2 for 1 stock split P2,000,000
Preferred stock P 625,000
Common Stock 2,000,000
Retained Earning 14,500,000
Total Stockholder’s Equity P29,625,000
B. a cash dividend of P1.75 per share. (2 points)
Cash Dividend (P1.75*2,000,000) P3,500,000
C. a stock dividend of 10 percent on the common stock. (2 points)
Addition to Common Stock (2,000,000*10%)*1 P200,000

Addition to paid-in-capital (200,000*P24) P4,800,000
TOTAL P5,000,000
5. At what price would you expect the DCM stock to sell after
A. the stock split? (2 points)
Stock Price = P25/(2/1) = P125
B. the stock dividend? (3 points)
Case 3:
DCM Company has released the following information.
Earnings available to common stockholders 6,000,000
Number of shares of common stock outstanding 1,000,000
Market price per share 90

Retained earnings 15,200,000
6. What are DCM’s current earnings per share? (2 points)

Earnings per share (EPS) = P6,000,000 earnings available/1,000,000 shares of common outstanding =
P6/share
7. What is DCM’s current P/E ratio? (2 points)

Price/earnings (P/E) ratio = 90 market price/6 EPS = 15
8. DCM wants to use half of its earnings either to pay shareholders dividends or to repurchase shares
for inclusion in the firm’s employee stock ownership plan. If the firm pays a cash dividend, what will
be the dividend per share received by existing shareholders? (2 points)
Dividends per share (DPS) = P3,000,000 total dividends paid** / 1,000,000 shares of common outstanding
= 3/share
**Total dividends paid = P6,000,000 earnings available / 2 = P3,000,000
9. Instead of paying the cash dividend, what if the firm uses half of its earnings to pay P100 per share
to repurchase the shares, what will be the firm’s new EPS? What should be the firm’s new share
price? (4 points)
Proposed dividends = 1,000,000 shares * P3/share = P3,000,000
Shares that can be repurchased = P3,000,000 / P100 = 30,000 shares
Shares outstanding = 1,000,000 - 30,000 = 970,000
Earnings per share (EPS) = P6,000,000 earnings available / 970,000 shares outstanding = P6.19/share
Share Price = P6.19 earning per share * 15 P/E Ratio = P92.85/share
10. Compare the impact of a stock dividend and stock repurchase on shareholder wealth. (2 points)
Both the stock dividend and stock repurchase has maximize the shareholders wealth because they would
receive a P3 per share under stock dividends and there is an increase of P2.85 per share in share price under
stock repurchase.

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LOJERO, PRINCESS GLAIDINE C.

Common stock (2,000,000 shares @ P1 par) 2,000,000

Paid-in-capital in excess of par 12,500,000

A. a 2 for 1 stock split of the common stock. (2 points)

Number of Shares (2,000,000/1)*2 P4,000,000

Multiply by: Par Value (2,000,000/4,000,000) 0.50

Total Common Stock after 2 for 1 stock split P2,000,000

Preferred stock P 625,000

Common Stock 2,000,000

Paid-in-capital in excess of par 12,500,000

Retained Earning 14,500,000

Total Stockholder’s Equity P29,625,000

B. a cash dividend of P1.75 per share. (2 points)

Cash Dividend (P1.75*2,000,000) P3,500,000

Preferred stock P 625,000

Common Stock 2,000,000

Paid-in-capital in excess of par 12,500,000

Retained Earning 11,000,000

Total Stockholder’s Equity P26,125,000

C. a stock dividend of 10 percent on the common stock. (2 points)

Addition to Common Stock (2,000,000*10%)*1 P200,000

Preferred stock P 625,000

Common Stock 2,200,000

Paid-in-capital in excess of par 17,300,000

Retained Earning 7,700,000

Total Stockholder’s Equity P27,825,000

A. the stock split? (2 points)

Stock Price = P25/(2/1) = P125

B. the stock dividend? (3 points)

Earnings available to common stockholders 6,000,000

Number of shares of common stock outstanding 1,000,000

Market price per share 90

6. What are DCM’s current earnings per share? (2 points)

7. What is DCM’s current P/E ratio? (2 points)

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Addition to Common Stock (2,000,00010%)1 P200,000