303052 Stock Dividend 1F

Question 1

A financial analyst values a corporation’s stock with the constant growth dividend discount model. The analyst assumes the following:

The dividend will grow by 3% per year.
8% is the annual required return for investors.
If the analyst calculates that the value of the stock is $183.50 per share, the dividend per share in the most recent year was closest to:

$14.

$9.

$15.

$5.

Answer 1

The correct answer is $9/share. The formula to calculate stock value is as follows:

Stock value = Dividend per share ÷ (Annual required rate of return – Dividend growth rate)
$183.50 = x ÷ (8% − 3%)
$183.50 = x ÷ (5%)
$183.50 × 5% = x
x = $9.18 (or $9 rounded to the whole number)

Question 2

Stock Dividend

Answer 2

Stock dividends are distributions of the corporation’s own stock (treasury or newly issued shares) to stockholders in proportion to the number of outstanding shares held. They do not change the par value per share or the shareholder’s proportional interest in the corporation, but they do increase the number of shares issued and outstanding. A stock dividend does not change assets, liabilities, or total stockholders’ equity. It merely transfers amounts between equity accounts. Accounting for dividends represents a disbursement (credit) to the capital stock account(s) and a reduction (debit) to Retained Earnings. Stock dividends are revocable up until the date of issuance (distribution) and may involve some special accounting issues.

FASB ASC 505-20-20

Stock dividends are used in calculating the weighted-average number of shares outstanding for EPS (earnings per share) computations and are given retroactive treatment “as if” the shares had been outstanding for the entire period.

Stock dividends represent return on investment to shareholders.

Question 3

The formula to calculate stock value is as follows:

Answer 3

Stock value = Dividend per share ÷ (Annual required rate of return – Dividend growth rate)

Question 4

2163.03

Answer 4

Dividend yield

• The dividend yield ratio shows the return to the stockholder based on the current market price of the stock.Dividend yield = Dividend per common share / Market price per common share
• Dividend payments to stockholders are subject to many variables. The relationship between dividends paid and market prices is a reciprocal one.
• This ratio is calculated using the current market price; however, most of the shareholders did not purchase their shares at the current price, thus making their personal yield different than the calculated yield.
• Calculation using data from the Sample Company for 20X2 (section 2160.01):

Dividend yield = Dividend per common share/Market price per common share

= ($10,000 ÷ 20,000 shares) / $17.00 per share = 2.9%