Question

A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 39 percent and will eventually reach 58 percent during the maturity stage (IV). a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.) Stage I $ 0.15 Stage II 1.50 Stage III 2.70 Stage IV 3.70

b. Assume in Stage IV that an investor owns 310 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Answer 1

Given,

Payout ratio (Stage I) = 0.00%

Payout ratio (Stage II) = 13% or 0.13

Payout ratio (Stage III) = 39% or 0.39

Payout ratio (Stage IV) = 58% or 0.58

Solution :-

Dividends per share (Stage 1) - Payout ratio X Earnings per Share I (Stage 1) Stage 1) = 0.00 X $0.15 = $0 Dividends per Share (stage 11) - Payout ratio & Earnings per Share (Stage 11) (Stage 1) - 0.13 x $1.50 = $0.20 Dividends per Share (Stage 111) - Payout ratio & Earnings per share (Stage 11) (Stage 111) = 0.39 & $2.70 = $1.05 Dividends per Share (Stage lu) - Payout ratio & Earnings per share Stage 10) (Stage ) = 0.58 x $3.70 = $2.15

b) Shares = 310 Tax (t) = 15 % dividends. Shares or o. is Total Payout ratio (Stage 10) & Earnings per Share (Stage 10) x Shares = 0.58 x $3.70 x 310 Shares = $ 665.26 After tax income from cash dividend - Total dividends (1 t) $665.26 (1-0.15) = $665.76 (0.85 ) - $565.47 Stock dividends of Stock splits are most likely to be utilized during stage 11/growth) or Stage 111 (expansion).