Birmingham-Bessemer Youth Ministries
Financial Literacy Program · Unit 13
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Unit 13 Assessment

Dividend Policy &
Share Repurchases

Brigham-Houston Ch. 14 · Dividend Theories, Payout Ratios, Stock Splits, Repurchase Methods & Residual Dividend Model · 2-Week Unit

100 Points Total
4 Sections
20 Questions
Payout · Yield · Residual Dividend
Auto-graded · Rubric Included
💵 Dividend Metrics
🔄 Residual Dividend Model
📦 Stock Splits & Stock Dividends
🔁 Share Repurchases
Dividend Metrics
Dividend Per Share (DPS)Total Dividends Paid ÷ Shares Outstanding
Dividend YieldDPS ÷ Current Stock Price
Payout RatioDPS ÷ EPS (or Total Dividends ÷ Net Income)
Retention Ratio1 − Payout Ratio = Retained Earnings ÷ Net Income
Dividend DatesDeclaration → Ex-Dividend → Record → Payment
Residual Dividend Model
Step 1 — Target EquityEquity needed = Capital budget × Equity fraction of target capital structure
Step 2 — Retained Earnings AvailableUse net income first to fund the equity portion
Step 3 — ResidualDividend = Net Income − Equity needed for capital budget
Key InsightDividends are paid only from earnings left AFTER funding all positive-NPV investments
ResultDividend policy is a residual — investment policy dominates
Stock Splits & Stock Dividends
Stock SplitIncreases shares; reduces price proportionally · e.g. 2-for-1 doubles shares, halves price
Stock Dividend (%)Distributes additional shares as a % of holdings · reduces price proportionally
Effect on Shareholder WealthNo change in total value (proportional dilution)
Purpose of SplitsLower share price to improve liquidity and accessibility for retail investors
Reverse SplitReduces shares; raises price · used to meet exchange listing requirements
Share Repurchases
Open-Market RepurchaseFirm buys own shares on the open market — most common method
Tender OfferFirm offers to buy shares at a premium above market price
Dutch AuctionShareholders submit prices; firm buys at lowest price that clears desired quantity
EPS EffectBuyback reduces shares → EPS rises (same earnings, fewer shares)
Tax AdvantageCapital gains taxed at lower rates vs. ordinary income on dividends · benefits high-income investors
Dividend Theories →
MM Irrelevance
Policy doesn't matter
Perfect markets: investors homemade dividends
Bird-in-Hand
High dividends preferred
Cash now is less risky than future gains
Tax Preference
Low dividends preferred
Capital gains taxed lower than dividends
Clientele Effect
Different investors need different payouts
Retirees prefer high yield; growth investors prefer low
Signaling Effect
Dividend change = management signal
Cut signals distress; increase signals confidence
—
out of 100 points
—
Section 1
—/40
Multiple Choice
Section 2
—/20
True / False
Section 3
—/20
Short Answer
Section 4
—/20
Extended Response
⚠ Sections 3 & 4 are teacher-graded. Use the rubric selectors below to finalize the score.
1
Multiple Choice
Select the best answer · Payout ratios, dividend yield, residual model, splits & repurchase calculations
2 pts each · 40 pts
Click the best answer. Use the formula reference panel and dividend theory strip above. Each question is worth 2 points.
2
True or False
Click TRUE or FALSE for each statement
2 pts each · 20 pts
Select TRUE or FALSE for each statement. Each is worth 2 points.
3
Short Answer
Show all calculations + explain in 2–4 sentences · Teacher-graded
5 pts each · 20 pts
Answer in 2–4 complete sentences. Show every calculation step clearly. Rubric selectors appear after grading.
4
Extended Response — Swanson Initiative Holdings: Dividend Policy Recommendation
Residual dividend · Payout ratio · Repurchase analysis · Policy memo · Teacher-graded
20 pts
Read the scenario carefully. Write a well-organized policy memo of at least 8 sentences. Show all calculations with labeled steps. Use and underline at least four unit vocabulary terms.
📋 Scenario — Swanson Initiative Holdings: Setting Dividend & Repurchase Policy
Swanson Initiative Holdings (SIH) is the Swanson Initiative's community investment arm, structured as a for-profit corporation to generate returns that fund BBYM's programs. The board must set a formal distribution policy for the coming year. You are the student financial analyst advising the board.
SIH Financial Profile
Net Income: $500,000
Shares outstanding: 200,000
Target D/E (debt-to-equity): 40% debt / 60% equity
Capital budget (approved): $600,000
Stock Information
Current stock price: $25.00
EPS before any distribution: $2.50
P/E ratio: 10×
Repurchase Option
Board is considering using any residual cash (beyond dividends) to repurchase shares at $25.00 each
Shareholder Composition
~60% are retirees and community foundations (income-focused) · ~40% are growth-oriented investors
35 Write your full dividend policy memo covering all four parts: (a) Use the Residual Dividend Model to determine how much of SIH's $500,000 net income should be retained for the capital budget and how much can be paid as dividends — show each step (equity needed, retained earnings used, residual dividend), then calculate DPS and the payout ratio; (b) Calculate the dividend yield based on the residual DPS and the current stock price of $25.00; (c) If the board instead uses the residual cash to repurchase shares at $25.00, calculate how many shares would be repurchased, the new shares outstanding, and the new EPS after the buyback — explain the EPS effect; (d) Write a 2–3 sentence recommendation to the SIH board explaining which distribution method (cash dividend, share repurchase, or a combination) best serves SIH's shareholder base, referencing the Clientele Effect and Signaling Theory. Use at least four underlined vocabulary terms.
📋 Teacher Scoring Rubric
CriterionExcellent (Full)Proficient (Partial)Developing (Minimal)Score
Part (a) — Residual Dividend Model
Equity needed = $600,000 × 60% = $360,000 · Residual = $500,000 − $360,000 = $140,000 · DPS = $140,000 ÷ 200,000 = $0.70 · Payout ratio = $0.70 ÷ $2.50 = 28%		 All four steps correct: equity needed $360K, residual $140K, DPS $0.70, payout ratio 28% Three of four steps correct; minor arithmetic error Correct formula used but fewer than two values correct /6
Part (b) — Dividend Yield
Dividend Yield = $0.70 ÷ $25.00 = 2.8%		 Dividend yield = 2.8% correctly calculated with formula shown Correct formula; uses wrong DPS from Part (a) error but method is right Formula missing or yield not expressed as percentage /4
Part (c) — Share Repurchase EPS Analysis
Shares repurchased = $140,000 ÷ $25 = 5,600 shares · New shares = 200,000 − 5,600 = 194,400 · New EPS = $500,000 ÷ 194,400 = $2.572 (vs. $2.50 before)		 All three values correct: 5,600 shares repurchased, 194,400 remaining, new EPS ≈ $2.57; EPS increase explained Repurchase count and new shares correct; EPS calculation minor error or not explained Only one step correct or EPS effect not discussed /5
Part (d) — Policy Recommendation Recommends hybrid approach: cash dividend satisfies income-focused retirees (Clientele Effect), repurchase benefits growth investors (tax preference); references Signaling Theory — a consistent dividend signals financial health to the community; uses ≥4 underlined vocabulary terms Defensible recommendation; mentions clientele or signaling but not both; fewer than 4 vocabulary terms Recommendation without theory support or no vocabulary terms /5
Extended Response Total: — / 20

Ready to Grade?

Sections 1 & 2 auto-grade instantly. Use the rubric selectors for Sections 3 & 4.