a. Using Eq. (11-1) and rearranging, P, = P,(1 + p) - Dl

(1) With a dividend,

(2) Without a dividend, The investor would have the same total value (share price plus dividend of $1.35) either way.

340 Part III Financing and Dividend Policies Amount Tax Rate Tax A.1 Amount Dividend $1.35 30% $.405 $ ,945 Capital gain .75 20 ,150 ,600 Total after-tax return $1.545

b. 240,000 X $27.78 = $6,667,200

c. $6,667,200/2,400,000 shares = $2.778 cash dividend Share price after dividend = $25 - $2.778

= $22.222 111 12) (31 Stock Dividend Stock Split Reverse Spl~t Common stock (par) $ 2,400,000 ($8) $ 2,000,000 ($4) $ 2,000,000 ($16)

Additional paid-in capital 4,200,000 1,600,000 1,600,000 Retained earnings 5,400,000 8,400,000 8,400,000 Shareholders' equity $12,000,000 $12,000,000 $12,000,000 Number of shares 300,000 500,000 125,000