Question: Assume that you write a column for a very widely followed financial blog titled "Finance Questions: Ask the Expert." Your job is to field readers' questions that deal with finance. This week you are going to address two questions from your readers that have to do with dividends.
1: I own 8 percent of the Standlee Corporation's 30,000 shares of common stock, which most recently traded for a price of $98 per share. The company has since declared its plans to engage in a 2-for-1 stock split.
a. What will my financial position be after the stock split, compared to my current position? (Hint: Assume the stock price falls proportionately.)
b. The executive vice-president in charge of finance believes the price will not fall in proportion to the size of the split and will only fall 45 percent because she thinks the pre-split price is above the optimal price range. If she is correct, what will be my net gain from the split?
2: I'm on the board of directors of the B. Phillips Corporation, and Phillips has announced its plan to pay dividends of $550,000. Presently, there are 275,000 shares outstanding, and the earnings per share is $6. It looks like the stock should sell for $45 after the ex-dividend date. If instead of paying a dividend, the management has decided to repurchase stock,
a. What should be the repurchase price that is equivalent to the proposed dividend? (Hint: Ignore any tax effects.)
b. How many shares should the company repurchase?
c. You want to look out for the small shareholders. If someone owns 100 shares, do you think she would prefer that the company pay the dividend or repurchase stock?