eBay Inc. developed a Web-based marketplace at http://www.ebay.com, in which individuals can buy and sell a variety of items. eBay also acquired PayPal, an online payments system that allows businesses and individuals to send and receive online payments securely. In a recent annual report, eBay published the following dividend policy:
We have never paid cash dividends on our stock and currently anticipate that we will continue to retain any future earnings for the foreseeable future.
Given eBay’s dividend policy, why would an investor be attracted to its stock?
Answer:
The investor would receive a return on the investment through share price appreciation as internally generated funds are used to fund growth and earnings opportunities. Thus, investors in eBay would likely approve of this policy, because the company is able to earn superior returns with internally generated earnings beyond what investors could likely earn on their own by investing dividend distributions.
On May 12, 2014, Chewco Co. purchased 2,000 shares of Jedi Inc. for $112 per share, including the brokerage commission. The Jedi investment was classified as an available-for-sale security.
On December 31, 2014, the fair value of Jedi Inc. was $124 per share. The net income of Chewco Co. was $50,000 for 2014.
Compute the comprehensive income for Chewco Co. for the year ended December 31, 2014.
Answer:
CHEWCO CO.
For the Year Ended December 31, 2014
Net income $50,000
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments* 24,000
Comprehensive income $74,000
* 2,000 shares × ($124 per share – $112 per share)
We have never paid cash dividends on our stock and currently anticipate that we will continue to retain any future earnings for the foreseeable future.
Given eBay’s dividend policy, why would an investor be attracted to its stock?
Answer:
The investor would receive a return on the investment through share price appreciation as internally generated funds are used to fund growth and earnings opportunities. Thus, investors in eBay would likely approve of this policy, because the company is able to earn superior returns with internally generated earnings beyond what investors could likely earn on their own by investing dividend distributions.
On May 12, 2014, Chewco Co. purchased 2,000 shares of Jedi Inc. for $112 per share, including the brokerage commission. The Jedi investment was classified as an available-for-sale security.
On December 31, 2014, the fair value of Jedi Inc. was $124 per share. The net income of Chewco Co. was $50,000 for 2014.
Compute the comprehensive income for Chewco Co. for the year ended December 31, 2014.
Answer:
CHEWCO CO.
For the Year Ended December 31, 2014
Net income $50,000
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments* 24,000
Comprehensive income $74,000
* 2,000 shares × ($124 per share – $112 per share)
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