Question

Magna International just paid an annual dividend of $1.20 a share. The firm has a target payout ratio of .35 and a speed of adjustment value of .55. What is the expected value of next year's annual dividend if the firm expects its earnings per share to be $4.10?

		$1.21
		$1.25
		$1.29
		$1.33
		$1.37

Answer 1

Expected EPS = $4.10

Dividend (as per target payout ratio) = Expected EPS * target payout ratio

Dividend (as per target payout ratio) = $4.10 * 0.35 = $1.435.

Expected value of dividend = ((target dividend - current dividend) * SOA value) + current dividend

Expected value of dividend = (($4.10 - $1.20) * 0.55) + $1.20

Expected value of dividend = $1.33