Q12BP Peabody Mining Company鈥檚 commo... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 5: Q12BP (page 598)

Peabody Mining Company鈥檚 common stock is selling for $50 the day before the stock goes ex-dividend. The annual dividend yield is 5.6 percent, and dividends are distributed quarterly. Based solely on the impact of the cash dividend, by how much should the stock go down on the ex-dividend date? What will the new price of the stock be?

Short Answer

Expert verified

The stock will go down by $0.70 on the ex-dividend date. The new price of the stock will be $49.30.

Step by step solution

Information provided in the question

Selling price $50

Annual dividend yield = 5.6%

Calculation of decrease in stock price

The stock will go down by $0.70

$\begin{array}{rcl} Annual dividend & = & Dividend yield 脳 Selling price \\ = & 5.6 % 脳 $ 50 \\ = & $ 2.80 \end{array}$

$\begin{array}{rcl} Quarterly dividend & = & \frac{Annual dividend}{4} \\ = & \frac{$ 2.80}{4} \\ = & $ 0.70 \end{array}$

Calculation of new stock price

The new stock price will be $49.30.

$\begin{array}{rcl} New share price & = & Selling price - Quarterly dividend \\ = & $ 50 - $ 0.70 \\ = & $ 49.30 \end{array}$

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder鈥檚 claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder鈥檚 claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder鈥檚 claims	\)900,000
Total liabilities and stockholder鈥檚 claims	$8,500,000

Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders鈥� equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder鈥檚 equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder鈥檚 equity	\)15,680,000
Total liabilities and stockholder鈥檚 equity	$28,650,000

Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

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Short Answer

Step by step solution

Information provided in the question

Calculation of decrease in stock price

Calculation of new stock price

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