Difference between a stock dividend and a stock split

This is a paper that is focusing on the difference between a stock dividend and a stock split. The paper also contains additional questions to answer in the assignment paper.

Difference between a stock dividend and a stock split

Question 1: Firstly, what is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 100% stock dividend or a 2-for-1 split? Assume that either action is feasible.

Question 2: Secondly, one position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments. Explain what a residual policy implies (assuming that all distributions are in the form of dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.

Question 3: Indicate whether the following statements are true or false. If the statement is false, explain why.
1.       If a firm repurchases its stock in the open market, the shareholders who tender the stock are subject to capital gains taxes.

2.       If you own 100 shares in a company’s stock and the company’s stock splits 2-for-1, then you will own 200 shares in the company following the split.

3.       Some dividend reinvestment plans increase the amount of equity capital available to the firm.

4.       The Tax Code encourages companies to pay a large percentage of their net income in the form of dividends.

5.       A company that has established a clientele of investors who prefer large dividends is unlikely to adopt a residual dividend policy.

6.       If a firm follows a residual dividend policy then, holding all else constant, its dividend payout will tend to rise whenever the firm’s investment opportunities improve.

Difference between a stock dividend and a stock split

Question 4: Shapland Inc. has fixed operating costs of $500,000 and also variable costs of $50 per unit. If it sells the product for $75 per unit, what is the break-even quantity?

Question 5: Counts Accounting’s beta is 1.15 and its tax rate is 40%.

Question 6: Ethier Enterprise has an unlevered beta of 1.0. Ethier is finance with 50% debt and also has a levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is the additional premium that Ethier’s shareholders require to be compensated for financial risk?

Question 7: Nichols Corporation’s value of operations is equal to $500 million after a recapitalization (the firm had no debt before the recap). It raised $200 million in new debt and used this to buy back stock. Nichols had no short-term investments before or after the recap. After the recap,  . What is S (the value of equity after the recap)?
Question 8: Lee Manufacturing’s value of operations is equal to $900 million after a recapitalization. (The firm had no debt before the recap.) Lee raised $300 million in new debt and used this to buy back stock. Lee had no short-term investments before or after the recap. After the recap,  . The firm had 30 million shares before the recap. What is P (the stock price after the recap)?

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