I know this was discussed yesterday but no consensus was reached. The Q asked which would least likely have an aeffect i think on the D/E ratio? It was either A) Alternative 1–stock dividends or C) Alternative 4–switching to a target payout ratio I see rationale for both. A) because stock dividends doesn’t really chance your B/S but C) because switching to a target div payout ratio is a matter of policy announcement only
Was it the D/E ratio or “Leverage Ratio?”
i dont remember, pretty sure theyre the same thing
the show NY Wrote: ------------------------------------------------------- > i dont remember, pretty sure theyre the same thing Big difference because if they said “Leverage Ratio” (which from what I remember, it was), then it could be Assets / Equity according to DuPont wouldn’t it?
well which answer did u put
Leverage ratio it was…
did you put stock dividend or target payout ratio
Pretty sure that Stock Dividend does NOT affect leverage… It just dilutes ownership… Check @ Page 139 of Corp. Finance… ‘‘A stock dividend has no effect on a company’s capital structure…’’
terribly freakin worded question because alt 4 said they will set a target payout ratio. that doesnt do anything either. only when the actually dividend is paid out.
I think I might’ve picked stock dividends.
the show NY Wrote: ------------------------------------------------------- > well which answer did u put If you read my prior post - disregard. I chose target payout. Sorry
This was a freebie. It was so obviously stock dividends. You didn’t have to look at the other options.
jryan Wrote: ------------------------------------------------------- > This was a freebie. It was so obviously stock > dividends. You didn’t have to look at the other > options. why was target payout wrong
jryan Wrote: ------------------------------------------------------- > This was a freebie. It was so obviously stock > dividends. You didn’t have to look at the other > options. Wouldn’t a stock dividend increase your book value (par value of stock), but not your market value?
+1 stock dividend.
Nope. Stock dividend is the same as a stock split. You’re simply dividing the pie up more. The size of the pie whether we’re talking about book value or market value will not change.
stock divident is the answer… i checked it in the book…i got it wrong… i am the only one who said cash divident won;t change the ratio… i am an idiot…but yes confimred that stock divident is the answer… BTW, option 4 which was a target payout ratio was not one of the choices. i am sure becuase if it was i would have picked it… as it said pay target pay out ratio to maintain the same capital structure…funny did they even change the choices for differrent sets
Can’t remember the way that option was worded but remember it as implying a change in “cash” dividends paid which obviously increases the D/E ratio.
The more I think about it, the more I see that target payout is wrong. Target payout ratio is more than just an announcement but rather a dividend based on a target payout ratio. Remember this formula? Expected Dividend = (Previous Dividend) + [(expected growth in EPS) * (Target Payout) * Adjustment Factor). Thus, the actual dividend will be paid until it reaches the target ratio. Then, according to clean surplus: Book Value (End) = Book Value (Beg.) + NI - Dividends. Hence, changing your book value of equity. -1
fbc203, To be clear…you’re right that par value (i.e. paid in capital) goes up but it’s exactly offset by the reduction in retained earnings and therefore book value does not change.