Question

You own 10,000 shares (1%) of the outstanding shares of Yangtze Inc. You paid $5.00 per share shortly after the company went public. The company’s most recent statement of financial position is summarized below. The cur- rent market price of Yangtze shares is $15.00 and the company has never paid dividends. Yangtze is considering either paying a one-time special dividend of $1.50 per share or declaring a 10% stock dividend.
ANGTZE INC.
Summarized Statement of Financial Position
As at December 31, 2016
Cash .............. $ 1,700,000
Other current assets ........ 1,600,000
Non-current assets ........ 6,800,000
Total assets ......... $10,100,000
Current liabilities ......... $ 450,000
Long-term bank loan........ 2,550,000
Share capital (1 million shares outstanding) 3,000,000
Retained earnings.......... 4,100,000
Total liabilities and equity..... $10,100,000
Required:
a. Assume that Yangtze decides to pay a cash dividend.
i. Compare your personal financial position (investment and any cash received) before and after the payment of the dividend.
ii. Compare Yangtze’s financial position before and after the payment of the dividend.
iii. Contrast the change in your financial position with that in Yangtze’s.
b. Assume that Yangtze decides to issue a stock dividend.
i. Compare your personal financial position (investment and any cash received) before and after the payment of the stock dividend.
ii. Compare Yangtze’s financial position before and after the payment of the stock dividend.
iii. Contrast the change in your financial position with that in Yangtze’s.
c. From your personal point of view, which of the two types of dividends would you prefer to receive?
d. From Yangtze’s point of view, which type of dividend would you recommend that it declare?
e. Which type of dividend do you think the creditor who has provided the long-term bank loan would prefer that Yangtze pay? Why?
f. Yangtze managers have heard that several other companies have recently declared 100% stock splits and they wonder if they should do so too to keep up with the trend.
i. Based on the reasons for stock splits discussed in the chapter, do you think Yangtze is a good candidate for a stock split? Why or why not?
ii. What would be the effect of a stock split on your personal financial position? On Yangtze’s?


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  • CreatedJune 12, 2015
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