1. K-Electric Power Company is a power generation company, while Procter and Gamble is a consumer products company and Toyota Motors is an automobile manufacturing company. Which of the following is most likely to issue special dividends for sharing profits with shareholders in times of profitability, but conserve cash otherwise?

A. K-Electric Power Company.
B. Procter and Gamble.
C. Toyota Motors.

 

2. In a sales-driven pro forma analysis, net income grows from $1.58 million to $1.74 million. Assuming a dividend payout ratio of 50%, the increase in retained earnings is closest to (in $ millions):

A. 0.79.
B. 0.87.
C. 0.91.

 

3. Supers Controlisque recently declared a quarterly dividend of $1.13 payable on Thursday, March 6, to holders of record on Friday, February 21. What is most likely to be the last day an investor could purchase Supers’ stock and still receive the quarterly dividend?

A. February 18.
B. February 23.
C. February 21.

1. C is correct. Many cyclical firms (e.g., automakers) will use a special dividend to share profits with shareholders when times are good but maintain the flexibility to conserve cash when profits are down.

 

2. B is correct. The retained earnings in a pro forma analysis increases by net income less dividends:
Dividend = Net Income * Dividend payout ratio = $1.74 million * 50% = 0.87 million
Increase in retained earnings = $I.74 million – $0.87 million = $0.87 million

 

3. A is correct. If an investor purchases shares of stock on or after the ex-dividend date, the dividend will not be paid. The ex-dividend day is always two business days before the holder-of-record date and hence stock must be purchased two days before this date to receive the dividend. Two days before February 21 is February 19; hence the last day the investor can purchase shares and still receive the dividend is February 18.

 

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