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State/ProvincialEvent#2
CAREER CLUSTER
Finance
CAREER PATHWAY
CorporateFinance
INSTRUCTIONAL AREA
FinancialAnalysis
Published2015byDECAInc.Copyright2015byDECAInc.Nopartofthispublicationmaybereproducedfor
resaleorpostedonlinewithoutwrittenpermissionfromthepublisher.PrintedintheUnitedStatesofAmerica.
CorporateFinance15
State/ProvincialEvent#2
PERFORMANCE INDICATORS
1. Explainformsofdividends.
2. Discussfactorstoconsiderwhendecidingontheformofdividenddistribution.
3. Calculatethecostofpreferredstock.
4. Calculatethecostofcommonstock.
5. Describetheimpactofdividendsonthevalueofthefirm.
EVENT SITUATION
YouaretoassumetheroleofCFOatPEAR,anewcompanyinthetechnologyindustry.The
CEO(judge)hasaskedyoutolookintotheeffectofpayingoutdividends.
PEARwasincorporatedonJanuary1st,2012.AttheirfirstIPO,theyissued10,000sharesof
cumulative,6%preferredstockwithaparvalueof$50.Theyalsoissued100,000sharesof
commonstockonthatdate.
CorporateFinance15
State/ProvincialEvent#2
Duringthefirstyear,PEARmadeaprofitof$50,000butdidnotpayoutanydividends.
In2013,PEARmadeaprofitof$200,000andonDecember1 stdeclareddividendsof$75,000to
bepaidonDecember31stforstockholdersofrecordonDecember15th.
DuringJanuaryof2014,PEARissued5,000moresharesofcumulative6%preferredstockwith
aparvalueof$50and50,000moresharesofcommonstock.In2014,PEARmadeaprofitof
$500,000andonDecember1stdeclareddividendsof$150,000tobepaidonDecember31 stfor
stockholdersofrecordonDecember15th.
TheCEO(judge)hasaskedforyoutocalculatethedividendpaymentstobedisbursedtothe
varioustypesofshareholders. Additionally,theCEO(judge)hasaskedthatyouevaluatethe
impactofdividendsonthevalueofthefirm.
YouwillpresentandexplainyourcalculationsandrecommendationstotheCEO(judge)ina
roleplaytotakeplaceintheCEOs(judges)office.TheCEO(judge)willbegintheroleplay
bygreetingyouandaskingtoseeyourcalculations.Afteryouhavepresentedyourmaterialand
haveansweredtheCEOs(judges)questions,theCEO(judge)willconcludetheroleplayby
thankingyouforyourwork.
JUDGES INSTRUCTIONS
DIRECTIONS, PROCEDURES AND JUDGES ROLE
In preparation for this event, you should review the following information with your event
managerandotherjudges:
1. Procedures
2. PerformanceIndicators
3. EventSituation
4. JudgeRoleplayCharacterization
Participantsmayconductaslightlydifferenttypeofmeetingand/ordiscussionwithyou
eachtime;however,itisimportantthattheinformationyouprovideandthequestions
youaskbeuniformforeveryparticipant.
5. JudgesEvaluationInstructions
6. JudgesEvaluationForm
CorporateFinance15
State/ProvincialEvent#2
Pleaseuseacriticalandconsistenteyeinratingeachparticipant.
JUDGE ROLE-PLAY CHARACTERIZATION
YouaretoassumetheroleofCEOatPEAR,anewcompanyinthetechnologyindustry.You
haveaskedtheCFO(participant)tolookintotheeffectofpayingoutdividends.
PEARwasincorporatedonJanuary1st,2012.AttheirfirstIPO,theyissued10,000sharesof
cumulative,6%preferredstockwithaparvalueof$50.Theyalsoissued100,000sharesof
commonstockonthatdate.
Duringthefirstyear,PEARmadeaprofitof$50,000butdidnotpayoutanydividends.
In2013,PEARmadeaprofitof$200,000andonDecember1 stdeclareddividendsof$75,000to
bepaidonDecember31stforstockholdersofrecordonDecember15th.
DuringJanuaryof2014,PEARissued5,000moresharesofcumulative6%preferredstockwith
aparvalueof$50and50,000moresharesofcommonstock.In2014,PEARmadeaprofitof
$500,000andonDecember1stdeclareddividendsof$150,000tobepaidonDecember31 stfor
stockholdersofrecordonDecember15th.
YouhaveaskedtheCFO(participant)tocalculatethedividendpaymentstobedisbursedtothe
varioustypesofshareholders.Additionally,youhaveaskedthattheCFO(participant)evaluate
theimpactofdividendsonthevalueofthefirm.
TheCFO(participant)willpresentandexplainthecalculationsandrecommendationstoyouina
roleplaytotakeplaceintheyouroffice.YouwillbegintheroleplaybygreetingtheCFO
(participant)andaskingtoseethecalculationsandheartherecommendations.AftertheCFO
(participant)haspresentedthematerialandhaveansweredyourquestions,youwillconcludethe
roleplaybythankingtheCFO(participant)fortheirwork.
Duringthecourseoftheroleplayyouaretoaskthefollowingquestionsofeachparticipant:
1. Whywouldacompanydecidetopayoutdividends?
2. Whatmustacorporationhaveinordertodeclarecashdividends?
3. Asacommonstockholder,wouldyoupreferthepreferredstocktobecumulativeor
noncumulative?
CorporateFinance15
State/ProvincialEvent#2
OncetheCFO(participant)hasmadetheirpresentationandhasansweredyourquestions,you
willconcludetheroleplaybythankingtheCFO(participant)forthework.
Youarenottomakeanycommentsaftertheeventisoverexcepttothanktheparticipant.
.
SOLUTION
1.
2. Cash dividends can only be paid out if the company has enough cash and enough retained
earnings. If a company doesnt have enough cash or retained earnings but wants to
declare a dividend, they should give a stock dividend.
3. Answers will vary but may include:
Issuing preferred stock results in the cost of paying dividends, which are not tax
deductible. Raising money through debt results in the payment of interest, which is tax
deductible, making some companies prefer to raise capital through debt rather than
through issuing stock.
For PEAR, in 2012 and 2013, there are 10,000 preferred shares issued and outstanding.
Each preferred stock pays out $3 per year in dividends ($50*.06). As a group, preferred
stockholders expect $30,000 each year in dividends. In 2014, preferred stockholders as a
group expect $45,000.
6% payout rate on preferred stock should be compared to cost of borrowing money. CFO
(participant) may make assumptions such as the following. If PEAR borrows $500,000
(assuming P/S sold at par) at 8%, the interest each year would be $40,000. However
since interest is tax deductible, if the corporate tax rate is 30% the net cost would be
$28,000 versus $30,000 in dividend payment on $500,000, making raising capital
through debt cheaper than through issuing stock.
4. Raising funds through issuing common stock dilutes the proportionate interest of the
company that each stock owns. Common stockholders only receive dividends after all
preferred stock dividends have been paid.
Amount paid in
dividends
P/S Group Expect
P/S Group Get
1 P/S gets
2012
$0
2013
$75,000
2014
$150,000
$30,000
$0
$0
$30,000
$60,000
$6
$45,000
$45,000
$3
CorporateFinance15
State/ProvincialEvent#2
Dividends in Arrears
C/S Group Get
1 C/S gets
$30,000
$0
$0
$15,000
$0.15
$105,000
$0.70
5. Cash dividends result in reduced assets and reduced stockholders equity. Therefore, the
value of the firm is reduced. Stock dividends results in no change in assets or stockholder
equity totals, although they do change the composition of stockholder equity, transferring
some of the retained earnings to paid-in capital. Stock dividends increase the number of
shares outstanding resulting in lower earnings per share.
CorporateFinance15
State/ProvincialEvent#2
Interpretation Level
ExceedsExpectations
Participantdemonstratedtheperformanceindicatorin
an extremely professional manner; greatly exceeds
business standards; would rank in the top 10% of
business personnel performing this performance
indicator.
MeetsExpectations
Participantdemonstratedtheperformanceindicatorin
an acceptable and effective manner; meets at least
minimalbusinessstandards;therewouldbenoneedfor
additionalformalizedtrainingatthistime;wouldrank
in the 7089th percentile of business personnel
performingthisperformanceindicator.
BelowExpectations
Little/NoDemonstration
CorporateFinance15
State/ProvincialEvent#2
the049th percentileofbusinesspersonnelperforming
thisperformanceindicator.
Participant: _____________________________
INSTRUCTIONAL AREA
Financial Analysis
Little/No
Value
Below
Expectations
Meets
Expectations
Exceeds
Expectations
1.
0-1-2-3-4-5
6-7-8-9-10-11
12-13-14-15
16-17-18
2.
0-1-2-3-4-5
6-7-8-9-10-11
12-13-14-15
16-17-18
3.
0-1-2-3-4-5
6-7-8-9-10-11
12-13-14-15
16-17-18
4.
0-1-2-3-4-5
6-7-8-9-10-11
12-13-14-15
16-17-18
0-1-2-3-4-5
6-7-8-9-10-11
12-13-14-15
16-17-18
0-1-2
3-4-5
6-7-8
9-10
5.
6.
TOTAL SCORE
Judged
Score