Question 1: The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.
Mathews Co. Aaron Corp.
Growth rate in sales and earnings . . . . . . . . . . . . . . 5% 20%
Cash as a percentage of total assets . . . . . . . . . . . 15% 2%
Question 2: The Wallace Corporation has done very well in the stock market during the last three years-its stock has risen from $18 per share to $44 per share.
Its current statement of net worth is:
Common stock (3 million shares issued at par value of $10 per share,
9 million shares authorized). . . . . . . . . . . . . . $30,000,000
Paid-in capital in excess of par . . . . . . . . . . . . . . . . . 15,000,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000,000
Net worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90,000,000
a. What changes would occur in the statement of net worth after a two-for-one stock split?
b. What would the statement of net worth look like after a three-for-one stock split?
c. Assume Wallace Corporation earned $6 million. What would its earnings per share be before and after a two-for-one stock split and after a three-for-one stock split?
d. What would the price per share be before and after the two-for-one and the three-for-one stock splits? (Assume that the price-earnings ratio of 22 stays the same.)
e. Should a stock split change the price-earnings ratio for Wallace?