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The balance sheet for Ferguson Corp. is shown here in market value terms. There are 5,000 shares...

Question:

The balance sheet for Ferguson Corp. is shown here in market value terms. There are 5,000 shares of stock outstanding.

Market Value Balance Sheet
Cash $ 44,700 Equity $ 454,700
Fixed assets $ 410,000
Total $ 454,700 Total $ 454,700

The company has declared a dividend of $1.60 per share. The stock goes ex dividend tomorrow.

Ignoring any tax effects, what is the stock selling for today?

Ignoring any tax effects, what will it sell for tomorrow?

Ignoring any tax effects, what will the balance sheet look like after the dividends are paid?

Cash Dividend:

A cash dividend is paid to the shareholders out of the net income generated during the period and as a result of cash dividend, the cash balance is reduced to the extent of dividends paid on the asset side while the retained earnings are reduced by the amount of dividends under the liabilities side of the balance sheet. A cash dividend is declared by the board of directors and is paid within 30 days from the date of declaration.

Answer and Explanation:


Answer:

The computations for Ferguson Corp. are made below:

Part 1: The stock is selling for $90.94.

As per the data:

  • Market value of equity = $454,700
  • Number of shares = 5,000 shares

Computation:

  • Current Share Price = Market Value of Equity / Number of Shares
  • Current Share Price = $454,700 / 5,000 Shares
  • Current Share Price = $90.94

Part 2: The stock will sell for $89.34 tomorrow.

Computation:

  • Price Tomorrow = Current share price - Dividend declared
  • Price Tomorrow = $90.94 - $1.60
  • Price Tomorrow = $89.34

Part 3: The balance sheet after cash dividend is presented below:

Market Value Balance Sheet
Cash $ 36,700 Equity $ 446,700
Fixed assets $410,000
Total $ $446,700 Total $ 446,700

Working note:

The cash dividend paid is $8,000 (5,000 shares * $1.6 per share) and as a result, the cash balance will reduce to $36,700 ($44,700 - $8,000) and the equity will reduce to $446,700 ($454,700 - $8,000).


Learn more about this topic:

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Cash Dividends & Dividend Payment

from Finance 101: Principles of Finance

Chapter 16 / Lesson 1
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