Question #1
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 1
Status: Unattempted
Question
Last year, Calfee Multimedia had earnings of $4.00 per share and paid a dividend of $0.30. In the current year, the company expects to earn $5.20 per share. Calfee has a 30% target payout ratio. If the expected dividend for this year is $0.51, what time period is Calfee most likely using in order to bring its dividend up to the target payout?
Answer Choices:
A. 6 years
B. 4 years
C. 5 years
Explanation
The formula to determine the expected dividend increase in a target payout approach is:
Expected increase in dividends = [(expected earnings × target payout ratio) - previous
dividend] × adjustment factor
where the adjustment factor is 1 / number of years over which the adjustment will take
place.
Using the numbers given:
$0.51 − $0.30 = [($5.20 × 0.30) − $0.30] × (1 / n)
$0.21 = [$1.26] × (1 / n)
$0.21 / $1.26 = 1 / n
n = $1.26 / $0.21
n = 6